In which case I’ll be buying more, not selling anything.
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You could say the opposite had been true for markets prior to that.
Do you honestly believe that stocks in the S&P500 had reasonably and justifiably become worth 9 percent more within a mere 3 months, from mid-november to mid-february?
I’d rather say that has been an overreaction “in reverse”. Overreactions often lead to counter-movements in the other direction. In the end it balances out somewhat.
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It might be an overreaction to the previous hyper-optimism. I don’t know, but I don’t think this matters.
It’s hard to tell because what we think what is reasonable and justified doesn’t matter, even opinions of the smartest people on Earth on this subject don’t matter because the price, any price, is a result of an aggregation of the exchanges driven by subjective impressions of value. It can be irrational. Warren Buffet in fact thinks the price of gold (or bitcoin) doesn’t make any sense because it’s useless yellow junk, but it still preserves value since ancient times and performs not bad as investment since 2000s. I think iPhones are overpriced, but people still buy them for that insane price. That’s why I think the intrinsic value is a nonsensical concept. The price has only one natural boundary - scarcity, but within the physical limits of demand and supply, it’s driven purely by emotions.
So, to answer your question - was it justified? Probably not. Does it matter? It depends on whether most of the traders (who establish the price) consider it justified and are ready to buy and sell it at this price.
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This is my best current best guess about why the concerns over the coronavirus might very well be rational:
Governments, and I guess markets, are not concerned about the couple of thousand people infected in Italy, not even really about the couple of hundred people dead outside of China.
They are afraid about how this graph will develop:
The death rate with near-optimal health care is probably somewhat below 1%.
At the moment it seems that around 5-10% of the confirmed cases need critical care in hospitals. As there are probably a lot of mild unconfirmed cases, hospitalisation rate might be somewhat lower for the total population of infected.
Most Epidemiologists seem to think that it’s plausible that 30-60% of the population will be infected by the virus. Nobody seems to seriously belief that there is a significant chance that this won’t become a pandemic. To get a sense of what the real consequences of the virus will be, we need to consider how those 40%-of-the-population cases will be distributed over time. This epidemiologist thinks that without countermeasures there could be a peak when 10% of the population will be infected at the same time:
https://twitter.com/marcelsalathe_d/status/1235233832745529345?fbclid=IwAR0uU34l6zgifq9tU8PPKKpCN4KFo1t7KYp9Bvuo4Nris-ioHVlgcxvz8NA
Even if we believe that the hospitalisation rate will be at the lower end of the estimates, this would completely overwhelm our healthcare system. Not just the number of hospital beds but mainly the limited amounts of mechanical ventilation devices that are needed to keep covid-patients from dying of ARDS.
Without proper health care, the mortality rate could thus grow significantly larger. For example, Wuhan had a much larger mortality rate in the beginning. In part due to under-diagnosing of mild cases but likely also because hospitals were not able to treat patients fast/well enough.
Furthermore, China has a relatively good health care system. Now imagine how the whole situation could develop in places like Indonesia or India.
This is why governments think it is of critical importance that the spread of cases is slowed. If the temporal distribution of cases can be drawn out, less people need to be hospitalised at any given time, more people can benefit from life-saving ICU-equipment and thus there should be a lower mortality rate.
China has shown that it is possible to artifically slow the spread but it remains to be seen just how effective more liberal countermeasures are. There might also be other factors that could lead to a more drawn out (smaller) peak, like higher temperatures or selection pressure on less dangerous mutations of the virus.
One point to add is that it’s very unclear what the long-term health outcomes of the people who get severely ill from the virus but survive is. SARS lead to significant health problems in a large part of the infected population. As covid is generally less severe this will likely not affect quite as large a fraction of the infected but there is still a lot of uncertainty. If 4% of the total population lost on average half of their productivity and needed government assistance for a couple of years this would be pretty bad for the economy.
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Are you really sure thats what they are saying? I thought these are the numbers if no measures are taken. In Hubei province the growth is no longer in its exponential phase. Instead, 100 people get infected per day. At this rate, it would take 30 years for 1 million people to get infected. I get it, that it may go really bad if it spreads in India or Africa, but I still believe this number is not what you say it is.
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Because TLT is the only asset I am holding that made 10% plus the lat month. I reduced VDE which was a bad bet I made based on the near-east conflict, and rebalanced to TLT and KWEB. Oil price is probably going to go lower, US was not really affected yet by corona. So far I read about Lufthansa and Swiss regarding reducing their capacity, same thing will happen in the US. US has a crappy healthcare system, maybe Corona will even through out Trump from the White House.
I do it now because I expect exponential increase of Corona cases in the US and Europe for about a month then it will probably flatten. I don‘t think as many young people will die in Switzerland as in China because our lungs are not predisposed. But more elderly people will pass away for sure. I don‘t do huge reallocations. I increased on KWEB because I think the Chinese economy will recover first.
What about 9/11? It was an overreaction, two planes crashed in to some random buildings, some people died. Then, US decides to not fly anymore for some months because everyone is afraid. Markets are like people - irrational.
Thank you for this accurate post. 100% agree with you, we just had this discussion yesterday over lunch.
So basically you sold something that went down to buy something that went up.
It does not make much sense to me but I guess your stock exposure was too high for your taste.
Are you using a fixed asset allocation or just trying to time this?
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Kudos to you for buying insurance (TLT) before the virus hit your porfolio, not after. KWEB has also been very strong. This, however is not a moment to add, IMHO. If anything, it might be a good moment to rebalance. Sell gains of KWEB and TLT to bring your depressed assets back to target allocations.
Because for example, yesterday went up 2.49% and is paying 1.92% of dividends per year. You have the money in BND, AGG or TLT. If you don’t use it, is giving you some money in dividends. If I need I sell the ETF and use to buy stocks or stocks ETFs.
Look at that ETF. Are people betting on not flying ever again?
And a cool quote from Twitter
Two types of Coronavirus investors here:
The ones buying Zoom and Slack quoting Elon
And
The ones buying cruises and airlines and quoting Buffett
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@glina i agree with you that some great bargains are out there … it is just the question whether the worst is already over.
(read his prior posts and he explains why nearly always lump sum is the best thing to do… so clearly not a permabear.)
I was going off people like Marc Lipsitch. He thought it would be 40-70% of the population but now lowered his estimate to 20-60% [the 30% on my initial post were a mistake]:
This is not suuch a surprise, as the influenza virus often affect 10% of the population in a year, ncov seems to be more aggressive than influenza and noone has a immunity towards ncov.
I’m, however, not completely sure what countermeasures he considers for this estimate. I’m also not sure at how effective social-isolateion/handwashing/quaranteens are at diminishing the spread vs. delaying it.
And there is no evidence thus far, that I know of, that the current measures in europe and the US are very effective. But it’s just largely too early to tell.
I’m not sure if this is the valid question. The bottom may be in already now, or it may come in a week or two. If I were to build a position in JETS I would probably start right now and average down later if situation gets worse. It is cheap. Waiting for something dirt cheap to get even cheaper may be called greed.
The quote from Twitter has a deeper bottom though. Should we bet on current losers of old economy which may rebound in an undefined moment later on, or perhaps the current leaders which provide solutions that work now and will work in the future. Cloud-software stocks are a very hot topic now.
People will work remotely, videoconference, rely even more on collaboration software. What if this proves so efficient, that some of that business airline trafic never comes back?
Questions… questions. Betting on both approaches is probably the same as buying SP500 - let the market decide.
This assumes that hardly any measures are taken. I would not underestimate how effective social distancing and contact tracing is. If you reduce the transmissions by 50% and assume a basic reproduction rate of 2.5, you end up with an effective reproduction rate of 1.25. More drastic measures are probably enough to reduce the rate to below 1.
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https://www.medrxiv.org/content/10.1101/2020.03.03.20028423v1
Here is a not-yet-peer reviewed paper that looks at the infections in Shanghai. With contact tracing, isolation and social distancing, they observed e reproduction number of 0.4.
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Does it calculate the ‘contained R0’ in such a way?
From a market perspective this might be a rational reason to be pessimistic. If governments will issue drastic measures for months, this could lower productivity.
Also, I’m kinda sceptical that many governments will be able to really issue countermeasures in a orderly and reasonable manor (see Iran).
Re Shanghai:
This looks like really good news. I haven’t seen it before.
I can’t find the links right now. But I remember reading articles about Shanghai and Singapore doing a lot of things right but that many of their measures are not really feasible outside city states and in places with more civil liberties.
Wait - is it the same TLT as “iShares 20+ Year Treasury Bond ETF”?
In this case it is an extremely bold bet about US interest rates for the next 20 years!..
Or did you (or someone else) buy because “yesterday it went up 2.49%”?..
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This is not how it works. The ETF contains 20y Treasury Bonds issued from 20years back until now. With the interest rates cut, the previous issues yield higher than new issues which makes them more desirable = price goes up.
It’s fairly predictable that SNB will cut deeper, which means it may still be time to get into long term Swiss bonds.