Stock Market Crash Risk Adds Appeal to Conservative Investments

Paul Dykewicz

Stock market crash risk is adding appeal to conservative investments for those who are concerned about the rapid spread of the deadly coronavirus that is one of many possible “Black Swan” events that could tank stocks quickly.

The coronavirus not only has infected more than 23,000 people and killed nearly 500 since it surfaced in late 2019 but it also is slowing economic activity in China, as well as cutting demand for oil, reducing fuel prices and hurting the share price of energy stocks such as Exxon Mobil (NYSE:XOM). The World Health Organization declared the coronavirus a “public health emergency” of international concern, while the U.S. Centers for Disease Control and Prevention advised Americans against traveling to China and enacted mandatory federal quarantines for those arriving from the Wuhan region of the Asian nation that has produced the most cases.

Chart Courtesy of www.StockCharts.com

The CDC announced it is preparing for the coronavirus outbreak to turn into a pandemic, which means it would become an ongoing epidemic on two or more continents. Such spread of the coronavirus runs the risk of requiring quarantines and causing economic slowdowns in more countries than China and in continents beyond Asia.

A Pandemic Would Expand Risk of a Stock Market Crash 

How lethal the coronavirus will be is uncertain but a growing consensus among scientists is that it is readily transmitted and spreads quickly like influenza, in contrast to slow-moving deadly virus strains such as Severe Acute Respiratory Syndrome (SARS) in 2003 and the Middle East Respiratory Syndrome (MERS) in 2015. Before the coronavirus struck in December 2019 and its spread convinced the country’s leaders to isolate 50 million people to limit transmission, China’s economy already had slumped to its slowest growth in three decades amid a sustained trade war with the United States. 

SARS cut China’s economic growth a full 1 percent in 2003 and its impact on 2020 is expected to be worse. However, China’s economic growth still could reach 5.5-5.7 percent this year with its government using increased monetary and fiscal stimulus.

Amid the fallout, the People’s Bank of China (PBOC) cut short-term interest rates and injected an extra $22 billion, or 150 billion yuan, into the economy to improve liquidity in the nation’s banking system in a Feb. 3 response to the coronavirus. China’s central bank pumped a total of $170 billion, or 1.2 trillion yuan, into its banking system on the same day but most of it had been planned before the outbreak

Fears about the coronavirus led to a one-day fall in the Chinese stock market of 7.9 percent on Feb. 3 to mark its biggest plunge since August 2015. The single-day coronavirus-related drop wiped out $358 million in market valuation. The Xtrackers Harvest CSI 300 China A-Shares Fund (NYSE ARCA:ASHR), a tracking exchange-traded fund (ETF) for the China’s CSI 300 Index, shows the big one-drop fall, followed by a 5.79 percent rebound in the ETF on Feb. 4 after investors had time to adjust to the latest coronavirus news.

Chart Courtesy of www.StockCharts.com

“When compared to the 2003 SARS outbreak – also part of the coronavirus family – the now much increased contribution of consumer demand as a driver of growth means that the coronavirus outbreak could have a greater economic impact than in 2003,” opined Martin Petch, a Moody’s Investors Service vice president and senior credit officer.

Since then, China’s economic growth consumption has changed significantly, with consumer demand becoming a key driver that is more vulnerable to the effects of the outbreak, Petch continued. Unlike the rapid expansion and investment of the 2000s, China’s economy now is slowing due to trade tensions, reduced growth and demographic challenges, Petch added.

“The fact that the epidemic broke out just ahead of the Lunar New Year, a period of very high seasonal consumption and travel, will exacerbate the economic impact,” Petch concluded.

Reduced Market Capitalization of Falling Stocks Is Based on Many Factors

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Economics Professor Robert Shiller, of Yale University, once called the notion that investors lose money whenever the stock market tanks a “fallacy,” since the market value of stocks at a given time is based on many factors that are subject to change.

Author Nassim Nicholas Taleb, a Lebanese-American essayist, scholar, statistician, former option trader and risk analyst, wrote a 2007 book, “The Black Swan: The Impact of the Highly Improbable,” which focused on the extreme impact of rare and unpredictable outlier events. The coronavirus is only one of many possible triggers of events could raise the risk of a stock market crash until it eventually happens.

Commerce, travel and tourism between China and its trading partners will be restricted due to public health responses to the coronavirus.  One example is Hong Kong closing 10 of its 13 border crossings with mainland China to try to halt the spread of the outbreak that began in the city of Wuhan before extending internationally. Thailand also is in a quandary, since its economy relies on middle-class Chinese tourists, but it could be putting its own citizens at risk by allowing visitors who may transmit the virus.

Diversification and Utility Stocks Reduce Risk from a Stock Market Crash

Bryan Perry, who leads the Cash Machine advisory service aimed at offering high-yield payouts to income investors, said his current portfolio will not only survive the market scare of a coronavirus pandemic, but thrive in 2020 based on its holdings based on his 35 years of high-yield research, investing and market experience. Perry cited the perceived safety of the utility sector that has been receiving strong fund flows.

Three utility stocks held in the portfolio traded at new 52-week highs during the past week, Perry continued. Those utility stocks pay dividends that help insulate them from market downturns, as well as offer a chance to enhance returns with capital appreciation from their rising share prices.

Hilary Kramer, host of a national radio program called Millionaire Maker and head of the GameChangers advisory service, said investors seeking to produce growth from their portfolios but also add safety have a number of conservative investments they can choose to reduce risk. A portfolio could be devoted 50 percent to bonds and bond funds, 25 percent to equities and 25 percent to cash.

Kramer, whose newest book, GameChanger Investing, launched in January, recommends that diversified asset mix. 

Paul Dykewicz interviews Wall Street money manager Hilary Kramer, whose investment advisory services include Turbo Trader, High Octane Trader and Inner Circle.

Investors seeking safety can buy U.S. Treasuries that pay roughly 1.7%, said Kramer. Although that interest rate may not seem like much, interest rates in the United States could go negative if America slips into a recession and the Fed starts a new round of quantitative easing. In that context, investors would receive a “nice capital gain” along with income.

Germany’s 10-year bond yield remains negative at -0.33%, as is France’s at -.0.04% and Japan’s -0.02%, Kramer continued. Even former troubled debt countries such as Spain, at 0.35%, and Italy, 1.25%, have yields lower than the United States. From this perspective, U.S. yields could still fall further, Kramer added.

Certain corporate bonds are okay, but stick to high quality ones, Kramer said. America maintains “very low credit spreads” at the present time and they will surely widen if the economy worsens, which could cause a situation in which corporate bonds fall while Treasuries rise, she added.

Safety-Conscious Investments Reduce Stock Market Crash Risk

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“A good instrument to get exposure to high quality bonds is the iShares iBoxx Dollar Investment Grade Corporate Bond fund (NYSE:LQD), which has always performed steadily even in times where markets are in a panic mode,” Kramer said. “The fund is well diversified, with the top 10 names composing just 3.33 percent of the total holdings. The current yield of 3.24 percent remains very attractive.”

Chart Courtesy of www.StockCharts.com

For the stock portion of a safety-oriented portfolio, Kramer suggested staying with “good dividend payers” that generate substantial free cash flow and can withstand a recession. Avoid financial stocks until there are signs the worst is over in the economy, she continued.

“Even though they are good dividend payers, they are vulnerable in times of weakness,” Kramer said. “Food stocks such as General Mills (NYSE:GIS), with a dividend yield of 3.6 percent, consumer product companies such as Procter and Gamble (NYSE:PG), paying 2.4 percent, and utilities such as Public Service Enterprise (NYSE:PEG), yielding 3.0 percent, all are worthy of consideration.”

Chart Courtesy of www.StockCharts.com

Chart Courtesy of www.StockCharts.com

Chart Courtesy of www.StockCharts.com

If a bear market hits and worsens, consider funneling more cash into stocks, Kramer suggested. 

“Do not worry about catching exact bottoms, that is hard to do,” Kramer said. “If you start observing that a lot of stocks have a yield similar to LQD, that may be a good time to move in as stocks may be starting to get cheap.”

Retirees May Protect Themselves from Stock Market Crash Risk 

Bob Carlson, who leads the Retirement Watch advisory service and serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets, cautioned not to bet on one investment outcome or assume that you’ll be able to change a portfolio quickly enough if the situation warrants.

“The best approach for most investors is to have a balanced, diversified portfolio,” Carlson said. “You want to own different assets that do well in different environments. Own some assets that do well when the economy is growing — stocks and commodities — and some that do well when growth is poor –government bonds. Also own some inflation and crisis hedges, such as gold. I also like to own some investments that generate income and usually are stable in any environment, such as intermediate-term bonds and preferred securities.” 

Carlson also likes real estate investment trusts (REITs), which have a low correlation with the major stock indexes and do well in most economic environments. 

“They do well when the economy is growing and also are good inflation hedges,” Carlson said. “They also tend to hold value in all but the steepest economic declines. They should be in almost every conservative investor’s portfolio.”

The risk of a stock market crash is rising after the longest and biggest bull run in history that started in 2009. Whether a market correction or crash occurs, investors have access to conservative investments that can reduce their risk and still provide positive returns.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is the editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. Endorsements for the book come from Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Dick Vitale and others. Follow Paul on Twitter @PaulDykewicz.

 

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