Market Brief - March 27, 2020

Erica Szczech - Mar 27, 2020
Examining the effects of COVID-19 on financial markets and what course of action is needed and why.
Dreaming of calmer waters?

We know that the growing concern around COVID-19 has everyone feeling uneasy, especially as each of us face more changes to our daily routines, the health of our family and friends, and the future. We hope to give you some perspective and to let you know that we are here for you.

Financial markets have exhibited high levels of volatility over the past several weeks as they react to factors that include interest rates, a steep decline in oil prices and the economic and business implications of the coronavirus outbreak. This week we’ve seen some glimmers of hope and some good news that the number of cases in Italy are showing signs of cresting, while the White House has passed $2T in a stimulus package and Canada has pledged more than $82B.

This week in markets, we’ve seen huge upside swings, and Tuesday’s DJIA move of 11.37% was the 5th biggest rally in history and a day unlike anything seen since the early 1930s – well before most of our times. This underscores the potential for a quick recovery if and when we get through these trying times.

Let’s review recent market developments:

Concerns about the spread of the coronavirus on business activity weighed heavily on global asset markets, and central banks moved to support the global economy with lower interest rates and other monetary policy measures. The US Federal Reserve (Fed) made two emergency cuts to its policy rate, bringing the range to 0-0.25%, and initially announced a US$700 billion security purchase program to inject liquidity into the financial system (formerly known as quantitative easing).

The Bank of Canada also cut rates twice to support the Canadian economy, reducing its overnight lending rate to 0.75% with talk of a further 0.50% cut in April, 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 is the disruptive oil price war between Saudi Arabia and Russia. They announced plans to raise production (from lack of demand), in an effort to gain market share, all while cases of COVID-19 surged worldwide. The progressively stricter government policies and business responses, social distancing, travel bans, and general slowdown of business reduced oil consumption. Not to mention, the world’s largest consumer of oil - China has been stock piling at rock bottom prices.

What course of action is there and why?

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 any investment and apprehensive about what the future will bring. As hard as it is to remind ourselves amid such volatility, market declines are a normal part of the market cycle and investing.

Equity market 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.

Therefore, it’s important to take some comfort knowing 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 defense against this type of volatility in the marketplace.

A downturn in the market can be uncomfortable, but it’s not a good time for hasty actions. The key is to look beyond the short-term volatility and to envision the recovery.

Given experience, our advice is to stick with your long-term investment plan, created to reflect your personal objectives and time horizon. Remember that panic is a very human emotion, but never a good investment strategy.

Please stay safe and healthy.

 

The information in this newsletter is derived from various sources, including 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.