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This quarter’s "top of mind" topics
- Rebalancing to keep a portfolio in line with strategic targets, avoid underexposure to underperforming assets, and mitigate portfolio drag from market volatility
- Being conscious of upside risk given the potential for meaningful market gains in the near and longer term
- Considering opportunistic investments in “core compounder,” credit, contrarian/ distressed, and thematic strategies
In the current environment, what’s “top of mind” seems to be changing week to week, if not day to day. My goal in this note (with a title borrowed from a Frank O’Hara poem) is to attempt to bring a little perspective to the economic and financial impact of the coronavirus. Specifically, I outline possible scenarios for the disease and the markets, offer thoughts and lessons learned on market volatility, and provide a decision framework for the near and longer term. I’ll also touch briefly on two lingering investment issues: the underperformance of non-US stocks relative to US stocks and value stocks relative to growth stocks.
The coronavirus crisis: What really matters
In terms of the overarching health crisis, the goal currently is to contain the parabolic growth in the number of coronavirus cases in Europe and the US and “flatten the curve” as we’ve seen in China and South Korea. This raises a host of potential questions about the mechanics of the disease, the efforts to contain it, and the economic fallout. In terms of investment decision making, however, I think it’s possible to focus on a fairly narrow set of questions:
What is likely to drive markets in the short term? — Key issues here include what we learn about the disease over time (e.g., its progression and fatality rate), how society reacts (the containment measures each country decides on), and how governments respond to the economic impact of the chosen containment measures.
What is likely to drive markets in the long term? — Thinking about the longer term entails a very different set of issues, including fundamental changes in the trajectory of economic growth, earnings growth, and productivity. Feeding into this will be questions about technology’s role in society (increased use of tools that support telecommuting?) and geopolitical dynamics (a greater push toward deglobalization?). It will also be critical to watch for credit market contagion and the potential for it to push us into a deeper recession.
In contemplating these questions and their impact on investment decisions, I’ve been anchoring to the question, “Where will we be a year from now?” I think that can help filter out some of the near-term noise and panic. I’ve also sketched out…
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