From our CIO, Sevasti Balafas, GoalVest


After another terrible day yesterday in the markets, the markets are significantly down again this morning as the markets react to the European travel band and announced measures to help the economy and the coronavirus spread.

Meanwhile, the number of event closures continued to rise, as the NBA has suspended the remainder of its season, NHL has cancelled their season, 100’s of colleges and universities have ended their on-campus semesters and gone to on-line classes, and we even have a quarantine with a national army in New Rochelle, NY. All this is continuing to add fuel to this market panic which was driven even further by the collapse in oil production negotiations.  

The President laid out a number of economic initiatives yesterday and while they aren't a silver bullet (and most still need to get through Congress), should help soften the economic blow. The only silver bullet here would be for the growth rate of coronavirus cases to materially slowdown.   

Unfortunately, we are far from that as we have not taken drastic measures yet in highly populated cities and where the virus has started to spread. Due to its long incubation period, it's gone undetected for weeks now and with a shortage of testing kits, we don't know the real numbers on how far this has spread, cases will dramatically rise in the coming days. If China, South Korea or Italy are any example, it will take weeks (with drastic measures in place) before the spread is contained. 

The S&P 500 is now 20%+ off of its peak just 3 weeks ago and I don't want to attribute this solely to panic selling.  The Institute of Supply Management (ISM - a key indicator we track), issued a report yesterday which implies the coronavirus is having a material negative impact on global industrial and economic activity and expectations are for worsening business conditions ahead. 

The bottom line on all of this is macro and market indicators imply that the coronavirus fallout will be detrimental.  But the severity of it will depend on duration.  If, like China and South Korea, the U.S. can get this disease mostly contained within two months, then the economy and markets can rebound. If it can’t, then we are likely in for more pain as more and more businesses become stressed and there will be pressure on our financial system (which we currently don't have).  

So, what do we do? 

To be honest, a lot of what we should do doesn't start now, it starts with conversations we had at the beginning of our relationship and changes to the portfolio we make along the way.  The main ideas are, 1. that you have the appropriate amount of equity exposure in your portfolio to start with based on your financial situation and risk preferences, 2. you have a diversified, good quality portfolio in place appropriate for the late stages of an economic cycle, 3. we are in touch on cash needs and have a clear picture of liquidity needs for the foreseeable future.

However, this is a unique time and we have crossed over the threshold of "normal" volatility into a market that is reacting to the real economic impact of oil prices collapsing and a slowdown in global economic activity due to this virus. Actions: 
1.    while we've been underweight energy for the last couple of years now, I did trim some of the remaining minor energy exposure and left only the larger majors with the most solid balance sheets. 
2.    We took this opportunity to get creative and structured a note that will dampen volatility and earn an 8.2% coupon as long as we don't see an additional 40% drop in Amazon, JP Morgan, and Coca Cola stock (a bet I'm willing to make). Please call me on any questions on this, the trade will settle on 3/16 and will take a few days after that to price - terrible timing to not have a price immediately but great timing on the trade itself) 
3.    I will continue to look at your stocks and portfolios and trim areas that may not recover as much as others. 
4.    Now is a great time for tax loss harvesting. In taxable accounts you will see me make some pretty drastic changes but that will leave you with same exposure. If you see a bunch of trade notifications - I am NOT panic selling - merely booking losses for you.   So, I'm not selling out of your equities but replacing them with different equities so that I can book losses and help with your tax bill this year and in future years if losses carry over. (This is truly making lemonade from lemons)
Finally, my position on all of this is, if the response to coronavirus is a dramatic one and we slow down the growth rate within 6-8 weeks, this will all seem like a blip.  The longer it lasts, the longer people panic and businesses are shut down or deeply impacted (hotels, airlines, cruise ships), unemployment will rise, missed debt payments will rise and a contagion effect can take hold. I don't want to sell and lock in losses now because it's nearly impossible to get back in at the right time AND we are holding good quality positions. If you truly have a long term time horizon and you are not dependent on taking out large sums of cash in the next couple of years, my advice is to hold on so that we see how measures to slow the virus will help or not. I am not yet ready to use cash and buy into this market but we will get there and I am watching for a potentially good time to buy into the down market.
IF however, you do have liquidity needs coming up OR this volatility is too much (in case we had the wrong asset allocation to begin with), please call or email me to have a conversation about what we should do in your particular case. 

Sevasti Balafas


CEO & Founder

Not Just Investments. 
Financial Control.