February 19th, 2020

Chadd Mason, CEO The Cabana Group

Dow Plunges as Coronavirus Spreads to South Korea, Iran and Italy

As soon as we mentioned the first sign that the coronavirus was impacting earnings (Apple lowered forward guidance), the virus broke out of general containment in China and began rapidly spreading into South Korea, Iran and Italy. This news provided a significant psychological impetus over the weekend to sell risk assets in the belief that we have a true pandemic on our hands. This is a scary concept for us as humans, but is it going to bring down equity markets in and of itself?

No one knows for sure what the future will bring, but the simple fact is we are still in a growing economy and companies have continued to beat expectations on both earnings and revenue. The U.S. corporate earnings growth rate remains at a positive 8% year-over-year. The IMF is projecting international growth as well. This is not the data that bear markets are made of. That is not to say that a worldwide pandemic can’t change these positive numbers going forward, but until they do, the bull is still in the pasture. We have had an incredible run-up in stock prices over the last 13 months. We are way overdue for some pain. The coronavirus is as good of a reason as any, if not better, for some panic-induced selling. A rapidly spreading and uncontrolled “killer virus” has real sex appeal as far as the scare factor goes. Major market indexes dropped 5% over the past two trading days, wiping out the gains we achieved since 2020 began. The VIX (fear index) broke out above 23 on the back of today’s largest drop in the DOW since 2018. Bond yields collapsed even further and gold hit seven-year highs as money flowed to perceived safe havens.

I don’t know how this will ultimately play out over the next weeks and months, but I do know that times like this make having a system imperative. If you are buying or selling based on each day’s tape, you are in for some gut-wrenching times ahead. We are very likely to have more volatility like we just saw before the skies clear. Investors must take it in stride and realize we are investing for the next five years, not the next five days, or even five weeks. For those of you who are just starting out on the path and are becoming “investors” for perhaps the first time in your life, welcome to the NFL. This business is not for the faint of heart.

At Cabana, we remain in our Moderately Bullish Scene but are preparing to reallocate should conditions continue to deteriorate.

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This material is prepared by Cabana LLC, dba Cabana Asset Management and/or its affiliates (together “Cabana”) for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed reflect the judgement of the author, are as of the date of its publication and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Cabana to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Cabana, its officers, employees or agents.

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