Market Climbs a Wall of Worry Despite One Crisis after Another

Few investors have had the intestinal fortitude to remain resolutely invested throughout the numerous crises (and associated temporary market dips) that have marked the long-term bull market that began in 2009. This time it’s the threat of a coronavirus pandemic emanating from China which has quickly spread across the globe. This new virus has many similarities to SARS, which surfaced in November 2002 and remained a threat until July 2003. SARS killed 774 people and infected 8,098 persons in 29 countries.

It’s too early to tell what the ultimate outcome of the current outbreak will be, but it might help to review a timeline of past epidemics from 1970 to see how the market has reacted historically. What we see from the chart below is there is little correlation between the outbreak of these diseases and downside reversals in price trend of the market. Of course, these diseases were all eventually brought under control so none of them were sufficiently severe and long-lasting to impact long-term global economic growth. Nonetheless, the clear lesson to be learned is if one had been scared out of a fully invested position in response to these outbreaks, returns would have suffered in nearly every instance and sometimes dramatically so.

This illustrates one reason why Kensington doesn’t attempt to factor global macroeconomic or geopolitical risks into its model metrics. The underlying assumption that guides our models is that supply and demand ultimately determine price movement and that shifts in the balance between the two can be measured mathematically. We don’t try to ascertain what the actual forces are that drive the balance at a given moment. In fact, we believe it’s impossible to know those factors. Instead, we focus our efforts on the practical management and execution of our time-tested methodology. When our model indicates buyers are dominating sellers, the Managed Income strategy knows to be fully invested in high-yield corporate bonds. When the model indicates sellers have begun to take control and we are moving into a risk-off environment, the portfolio is shifted into low risk Treasury securities.

Our strategy takes a practical approach to geopolitical matters. This means that rather than making investment decisions based on fears of potential global pandemics, we stick to the facts. With this in mind, our strategy seeks to provide consistent, attractive returns despite tumultuous current events, and to minimize downside exposure in adverse market environments.