Q&A
Tackling investors’ concerns during coronavirus pandemic
By JACQUELINE GHOSEN
Published April 8, 2020
As the COVID-19 crisis sweeps much of the world, we worry not only about our health, but also about our jobs, our portfolios and our future. And while stock prices and markets are not necessarily at the top of our list, an expert from the School of Management offers some advice.
Cristian Tiu, associate professor and chair of the Department of Finance, specializes in stock markets, risk management and asset allocation. Below, he answers some of the top questions investors and families are asking now.
Should I sell my portfolio and get out of the market right now?
No. In fact, if you’re thinking opportunistically, you might buy some stocks if you can afford to. Amazon and Walmart have to continue to deliver. Everyone is moving to online teaching for a while, and Cisco, Zoom, Amazon and Microsoft are facilitators. Some airlines will rebound after being pounded severely from the beginning of this crisis. More generally, fixed-weight portfolios are rebalancing to their fixed weights by buying stocks right now because the equity portion of those portfolios amounts for a lower-than-target percentage. Look for good dividend yields and bargains. Don’t sell low to buy high.
How can I protect myself financially?
This is not an unusual question for America, a country thriving through individualism. Unfortunately, this is one instance in which individualism won’t pay off — for once, you should be thinking about your part in the solution. Keep your distance, avoid unnecessary outings, let a nurse in the grocery line go ahead of you. If everyone does these things, the virus won’t spread, the crisis will be over and we can return to our lives before this crisis. Be part of the solution, and you will be rewarded financially, too, in the economic recovery.
Aren’t markets overreacting? Isn’t the flu worse?
Mortality is worse for COVID-19, and the virus is more infectious. While I agree that the markets are overreacting (as volatility seems really high), they are overreacting to something that is already bad. Similarly, in markets in which sentiment is so dominant, overreaction as well as under-reaction by some investors are likely to spread. So crashes seem large, and rallies unrealistically large too.
Should I buy put options to hedge?
A put is an options contract that gives the owner the right, but not the obligation, to sell a certain amount of an underlying asset at a set price within a specific time. And the answer is no, you should not buy put options — at least not right now. There are two things that make put options expensive: one is low prices (and the prices are low now) and the other is market high volatility (the index of volatility, the VIX, is also at very high levels now — about 70% when “normal” levels are more like 20%). If anything, for those with nerves of steel, this is the time to sell put options. This is going long in the market when the market is low, and selling volatility when the volatility is high. Again — only if you have nerves of steel. When it comes to stock prices, uncertainty brings volatility.
What is a worst-case scenario and a best-case scenario for the U.S. economy?
A worst-case scenario is one in which the economy stops for a longer time, and we see a deep recession. Consequently, supply will also be low, and thus prices will be high. That translates into economic contraction (think stock prices going down) coupled with inflation (value of money going down, too). This is the no-escape scenario of stagflation.
Best-case scenario? We find antiviral drugs to slow the coronavirus down and produce a vaccine in record time. Moreover, we learn how to do this relatively quickly for any virus. As a result, confidence will increase and, happy we escaped, we will return to enjoying life by going out and traveling with the confidence that modern medicine can now efficiently fight viruses — something we are not very successful at currently.