Updated Coronavirus Thoughts – Seeking Alpha

When I first wrote preliminary thoughts about the coronavirus on January 24th, the article was focused on the potential negative impact to Chinese growth, a regional pan-Asian impact to directly impacted sectors - travel/leisure, airlines, hotels, and gaming - and a negative impact on commodity-sensitive sectors given the potential for lower Chinese demand and reduced air travel.

The analog for framing the impact of the Coronoavirus was to the 2003 SARS experience, which saw a modest negative impact on Chinese growth and quick rebound. Through that experience, U.S. assets, which were still recovering from the deflation of the tech bubble and a 2001 recession, did quite well. The Covid-19 outbreak now is a global pandemic, with infections and deaths far outpacing the 2003 experience. Transmission of the virus to the U.S. has weighed on risky assets stateside. In this article, I want to provide updated thoughts on the current economic situation and market conditions. I am going to discuss the impacts in four parts: Economics, Markets, Behavior, and Long-Term Impacts.

The speed of the correction in equity markets has been dramatic and historic. Some part of that is rational given the sharp change from an economy operating near full capacity to one that could already be in recession as business activity grinds to a halt. Part of the move is irrational as fear of the unknown and the never-before-seen change in the everyday life of Americans fuel some level of panic.

The next several weeks are going to feel long. It was just Wednesday that American sports teams were playing in front of crowds. We have had the largest single-day stock loss since 1987 and the largest single-day gain since 2008 in the interim (and a welcomed weekend break).

Crises ultimately bring opportunity, but it will likely get darker before the dawn. We will very likely retest Thursday's lows. I am thinking about the market opportunity both strategically and tactically.

Strategic: For those looking to add into weakness, I would focus on a strategic rotation of some fixed income into equities. For many readers, that might mean a rotation in retirement accounts. A buy-and-hold 10-year Treasury will deliver a sub-1% annualized total return to investors; equity gains are going to be higher, even if volatility could be nausea-inducing for some over the next several quarters. While we are likely heading into recession, strangely, the prospect of positive total returns for U.S. equities 5-10 years in the future is potentially higher today than it was at the start of the year given the sharp drawdown from high valuations. A strategic shift might also mean a slow tilt towards more non-US assets for investors who have benefited from an overweight to outperforming U.S. assets in the post-crisis era. The relative outperformance for U.S. assets has again accelerated versus developed and most emerging markets. Strategic investors should keep their eye level fixed on a long-term horizon and add into weakness. Volatility is ahead though, so a judicious pace of easing into new long-term holdings is warranted.

Tactically: Some investors may look to use the historic volatility to trade more liberally. Thursday's drop would have been the fourth-worst annual drop for stocks this century (trailing only 2001-2002, 2008). Friday's rebound of 9%+ would be a solid annual return given the view of subnormal returns heading into the year. If you want to play some of this volatility to reap short-term gains, remain broadly diversified and focus on strategies that you would be comfortable owning long term. Avoid single companies with weak balance sheets - poorly functioning credit markets may turn some of those stocks into 100% losses. Broadly diversified exposures in underperforming value, small-caps, non-US developed markets, and higher-quality emerging markets may provide opportunity to buy into weakness and sell into strength. I would rather play it from the long side than the short side. Recessions end.

Please share your own thoughts in the comments section below. This is a unique market environment, and crowdsourced opinions from people with differing perspectives and circumstances are valuable.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term, risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance and investment horizon.

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Updated Coronavirus Thoughts - Seeking Alpha