The novel coronavirus COVID-19 continued its spread globally during March and has had significant impacts on financial markets as well as the global economy. Governments have implemented social distancing and fiscal measures in order to “flatten the curve” and central banks have been quick to respond by providing much needed liquidity. As an investor it is important during these times to maintain discipline and diversification and avoid any market timing strategies.
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close March 31 2020.
Throughout the month of March, we have seen elevated volatility in markets. Circuit breakers that are used to halt trading, which are rarely triggered during normal conditions, have been used on multiple occasions as investors and institutions had been selling in bulk to raise liquidity, or simply out of fear that markets will drop further.
This sell off has been the quickest bear market ever reached but so has the speed at which policy makers have responded. Central bank response has been coordinated globally and benchmark interest rates in Canada and the U.S have moved even closer to zero. In addition to the monetary policy response, governments have also responded very rapidly and have introduced unprecedented stimulus with the Canadian government allocating $82 billion and the US government a massive $2 trillion package.
Since the introduction of these policies, markets have responded positively and have risen modestly during the last few trading sessions of the month. Policy responses will help limit the economic damage of the virus, however the catalyst to a recovery will be a flattening of the curve, people going back to work, and social life returning to pre-social distancing norms. As we are not there yet, we can expect volatility to persist until there is a clearer direction on this source of uncertainty.
It is reasonable to expect a recovery, though we don’t know the speed at which it will happen or what will transpire in the short-term. However, once a recovery starts, significant gains often are achieved early on as markets price positive expectations; those who were out of the market because they didn’t believe a true bottom had been hit, end up materially underperforming in the long run. You can see this in the previous bear market information below.
Although markets have dropped significantly, take comfort knowing that the Canadian investors with diversified portfolios have survived world wars, depressions, and pandemics before. There is little to make us think things will be different this time.
Businesses will continue to exist, to produce, to employ, and to generate value for investors. As a long-term investor, keep your eye on the prize and tune out the noise.
We hope you all stay healthy and can use the time social distancing to spend with your families and maybe even learn something new. If not, there is always Netflix!