Panic & Pandemics (Actively Managing Risk)

Many market prognosticators listed China as a 2020 risk to the global economy. But it was global trade that many feared, not a virus contracted through snakes and bats. As respected financial blogger Morgan Housel recently wrote: Risk Is What You Don’t See.  Nobody expected a pandemic to be ‘the thing’ to end the historic rally.  And maybe it doesn’t.  The uptrend in stocks is still intact, for now.  Nobody knows how many will be infected with the virus, or worse, die.  And nobody knows what the ultimate impact to the global economy will be. Please understand that estimates from talking heads, pundits, and influencers, are mere guesses, nothing more. I’ve seen and heard many comparisons to the SARS epidemic of 2003 to help provide historical context. Most of these comparisons are being used to allay fear: SARS only infected 8,000, only killed 770, only took the market down 10%, only lasted 6 months.  But the coronavirus is not SARS, and the stock market of 2003 is worlds away from today’s exuberant market.  In 2003, we were still recovering from a recession that crushed the stock market for more than 2 years in the wake of the Tech Bubble bursting, 9/11, and Enron/WorldCom bankruptcies. The sentiment regarding the stock market today is the exact opposite.   

 I hope I’m wrong, but I suspect the coronavirus could have a bigger human and economic impact than SARS in 2003.  

A few stats that have me more concerned than most: 

  • In 2003, China’s economy ($1.7 trillion) represented 4% of the global economy

  • In 2019, China’s economy ($14.3 trillion) represented 16% of the global economy

  • In 2002, 36% of Chinese lived in cities, today, it’s 58% (urban concentration increases potential of human to human transmission)

  • The median age in China has increased by 6 years (31 to 37), older folks face greater mortality risk

(source: DataTrek, 1/27/2020)

 And this from Reuters:

 “China is the world’s biggest outbound international travel market and the second largest domestic aviation market…about 450 million more passengers fly to, from and within China per year compared to a decade ago…”

 (source: Reuters, 1/28/2020)

 Coming into 2020 (prior to the coronavirus outbreak) we took a few steps to reduce risk in client portfolios.  I remain concerned about the slowing global economy, the recent increase in unemployment claims, and an overheated market that shot 30% higher in a year where corporate profits were flat, and the economy limped along at 2%. 

We have executed the following:

  • reduced exposure to corporate bonds, reallocated the proceeds to safer US Treasuries and muni bonds (tax free)  

  • reduced our exposure to overheated growth stocks, and reallocated proceeds to high dividend, low PE stocks

  • increased hedges in the portfolio, designed to go up when the market goes down

  • this week we took additional steps to reduce our exposure in China, and added a small position that shorts (or bets against) China

Please keep in mind that these are relatively minor adjustments.  We took what we believe are prudent strategic steps to reduce risk.  However, if we see panic in the market, this may present some opportunities to buy at more attractive (lower) prices. 

The future may be more expensive than you imagine.  Aging demographics may lead to lower Medicare and Social Security benefits, which means higher out of pocket costs in retirement. I also believe that the exploding national debt and climate change will result in higher taxes regardless of who wins in November.  To combat all of this, your money must grow.  We’re here to help you build a comprehensive plan to sustain your lifestyle in the decades ahead. 

I truly hope that the coronavirus virus issue is resolved in short order and human suffering is limited.  In the meantime, we are monitoring the outbreak and managing risk. 

Be safe.

 

-randy

The opinions expressed in this communication are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed in this communication is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

 

Hamilton Wealth, LLC is a registered investment adviser. Advisory services are only offered to clients or prospective clients where Hamilton Wealth, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Hamilton Wealth, LLC unless a client service agreement is in place.