Markets and COVID-19
Dear Client,
Financial markets have exhibited high levels of volatility over the past several weeks as they react to factors that include reduced interest rates, a steep decline in oil prices and the economic and business implications of the coronavirus (COVID-19) outbreak. I am writing today to provide you with some further perspective on these developments and what the market’s fluctuations may mean for your investments in the longer term.
What are the most recent market developments?
Concerns about the spread of the coronavirus on business activity are weighing heavily on global asset markets, and central banks have moved to support the global economy with lower interest rates and other monetary policy measures. The U.S. Federal Reserve has made two emergency cuts to its policy interest rate, bringing it down to a range of 0-0.25%, and has announced a US$700 billion security purchase program to inject liquidity into the financial system (quantitative easing). The Bank of Canada has also cut interest rates twice to support the Canadian economy, reducing its overnight lending rate to 0.75%, while the G7 group of countries announced that it would be willing to use “all appropriate policy tools” to provide economic support amid the ongoing COVID-19 outbreak.
Also affecting financial markets has been a disruptive oil price war. Saudi Arabia and Russia announced plans to raise oil production, reducing oil prices in an attempt to gain market share. This in turn has affected energy companies in the U.S. and here in Canada. Although it is much less expensive to fill your gas tank, it is much less profitable for energy companies to extract, refine and sell you that product.
In addition, as the number of cases of COVID-19 surged worldwide, this has triggering progressively stricter government policies and business responses such as social distancing, travel bans and the suspension of professional sporting events. It follows that share prices on related companies (travel, restaurants and entertainment companies) have also been reduced. Productivity, sales and earnings could also be affected as multiple employees work outside their normal office structure. And supply chain interruptions with borders closing could also affect normal production in many factories. The total impact could very well drag the global economy into recession.
How should I react?
We believe in the following principles that have served us well as professional advisors and as long- term investors for many years:
1) It is imperative to have a plan or a sound intellectual framework that includes a risk assessment. Why are you investing? What risk can you assume? How long are you investing for? Is there a time frame when you will need access all of your money?
2) It is imperative to have discipline and to be consistent when evaluating different investment opportunities.
3) It is imperative to have control of emotions, especially during times like this.
On an emotional level, it can feel very difficult to adhere to a long-term financial plan when faced with daily volatility and a stream of negative news. It is natural to be concerned about the value of your portfolio, apprehensive about what the future will bring, and tempting to make drastic changes. As hard as it is to remind ourselves amid such volatility, market declines are a normal part of investing. Severe corrections like the one we are now experiencing are less common but have been an occasional occurrence. Although the timing is unknown, such setbacks have historically been temporary, and stocks have inevitably recovered.
That is why it is important to take some comfort in the fact that your portfolio is diversified. A portfolio that is diversified by asset class, sector and region will have more stable returns, because not all investments provide the same returns at the same time or respond to events in the same way. A well-diversified portfolio geared toward your financial goals and risk tolerance is still the best defence against this type of volatility in the marketplace. A downturn in the market can be uncomfortable, but it’s no time for hasty actions. The key is to look beyond the short-term volatility and to envision the recovery.
For some perspective, I’ve included a chart below which outlines the market’s performance during viral outbreaks over the last two decades, as well as the 12-month return which followed. The data is based on the S&P500 Index, which is the largest 500 companies in the United States, and I believe this is a better indication of returns than the smaller data size Dow Jones Industrial Average (only 30 companies) or the TSX Index (about 250 companies). I believe it is important to keep this data in mind when the markets feel as turbulent as they have recently.
We wish that we could tell you with exact clarity when the stock market will start it’s path to recovery. We can’t. What we can say is the following:
• History has shown that every bad market period is followed by a good period that generally lasts for years.
• Your investments are tailored to your own specific needs of risk tolerance, time horizon, and liquidity needs.
• Panic is not a sound investment plan. We will never make emotional decisions and you shouldn’t either.
• We are here, and available at any time for your inquiries by telephone, email or in person.
• We are in regular communication with Portfolio Managers from around the world continuously assessing current circumstances.
• We worked through the dot-com bubble burst, 9/11, the 2008 financial crisis, the Japanese tsunami, Fort McMurray fires and Brexit. We will successfully guide you through this period as well.
• Remember that this is not a financial crisis such as a depression. This is a health issue that should be resolved with a large social and medical response.
• The economies in both Canada and the U.S. were doing reasonably well heading into this virus. Interest rates are close to zero and unemployment rates in Canada and the U.S. were at 60 year lows.
• Infection rates in China and South Korea seem to have peaked and are now turning down. Will the same thing happen in North America soon?
• Once this downturn period ends it is likely to turn into one of the greatest buying opportunities for stocks in a generation.
I hope that this letter has provided you with some useful information and strategies to help withstand market volatility. My advice is to stick with your long-term investment plan, which was carefully constructed to reflect your personal objectives and investment time horizon.
At times like these, it is only natural to ask questions about your portfolio results and overall financial plan. if you have concerns about your portfolio, I am here to address them. Please do not hesitate to contact me at (519) 432-6744 X238.
All the best,
Mark McConnell, BA (Economics), DipBIS
Senior Investment Advisor, Branch Manager
Mandeville Private Client Inc. is a Member of the Investment Industry Regulatory Organization of Canada and a Member of the Canadian Investor Protection Fund.
This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness.
Source: CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bloomberg Finance L.P., Yahoo Canada Finance, and Trading Economics.