View from the Chair: Windermere’s Market Perspectives (February 2020)

February 6, 2020

“When the facts change, I change my mind “

This well-known quote from John Maynard Keynes is a seemingly sound piece of advice. However, when it comes to your investing journey, you have to be careful about changing your mind too quickly.

When major events occur and media headlines express panic and uncertainty, our instincts are to react. We are hard wired to take action. We tend to interpret all news as fact. We believe we need to do something and become convinced that it’s time to change our mind – and our approach.

Try to resist this urge. Assess the situation, do your best to separate fact from opinion, and look at the full picture. You may just find out that there is no need to change your mind (or your plan). Sometimes the best action is no action.

The events surrounding the coronavirus in recent weeks are an excellent reminder of this very concept.

Assess the Situation

Let’s start by interpreting the recent events related to the coronavirus. We want to be clear – we are in no way trying to downplay the impact of the coronavirus. It is a terrible disease that has led to many deaths and has disrupted countless lives and economies around the globe. However, it’s important to remember that while there are daily updates and headlines, the truth is that it may take a couple of months to begin to assess the actual impact on the global economy and markets.

Without quantifiable data from this outbreak, we can only look at past events for “facts.” This Schwab article does an excellent job outlining past viral outbreaks and the ultimate impact. The conclusion – the impacts were temporary and quickly abated once the disease was under control.

Will history repeat itself this time around? No, it never does. But it does tend to rhyme, so this information should be carefully considered. It’s also important to remember what has changed. China plays a much larger role on the global scene that it has during past outbreaks. It accounts for 35% of global manufacturing output, consumes a considerable amount of commodities, and has a robust tourism market (its share of world tourism has doubled in the past 10 years)

Fortunately, China also has many resources at its disposal to react and respond. China’s government has already taken action by infusing cash to provide liquidity and easing lending conditions.

Look at the Full Picture

The coronavirus certainly poses risks to equity markets. Several companies have already cautioned investors that results will be impacted due to store closures and manufacturing disruptions in China. Any slowdown to global growth can dampen earnings estimates and/or confidence which can lead to lower equity prices.

It’s likely the coronavirus will have just as significant (if not more so) impact on fixed income markets. This article by Schwab does an excellent job explaining their change in fixed income outlook for the year. They are now calling for steady to falling interest rates in 2020, given the predicted slowdown in global growth and the likely need for the US Federal Reserve to react (Given that the US is one of the few central banks with room left to ease, it is not out of the realm of possibility that further rate cuts will occur)

Time to Change your Mind?

Based on our assessment of the situation, we do not believe there is a reason to deviate from long term investment plans. Here are just a few of the reasons why:

1.) Choice – As we’ve written about before, investing is always an exercise in choosing between the available options. When we look at the choices, it remains clear to us that a mix of assets, with a focus on equities, is where we want to be positioned. These events do nothing to change that thinking, as rates are likely to fall further, making equity return potential increasingly attractive in comparison to fixed income and cash yields

2.) Diversification works – These events can never be predicted or fully understood. Having exposure to a variety of asset classes provides some protection to the overall portfolio as asset classes will likely react differently to events. For instance, in this case, as stocks fell, bonds rose with the sharp drop in yields

3.) Timing is dangerous game – As we’ve seen in recent weeks, markets can sell off one day and all but fully rebound the next. Trying to get out and back in is a fool’s errand. Instead, use strength to rebalance against your long term targets and use any weakness to add to asset classes and securities when they are “on sale”

4.) Remember what you own – stocks represent ownership in a business’ future earnings and cash flows. A bond represents a promise to repay. While short-term events may impact their stated prices, you still have an ownership interest in the underlying business or promise that has years to advance, innovate, generate new products and services, and add long-term value to its owners. Keep that in mind before you rush to take action

Invest on,


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