Market Brief - April 3, 2020

Erica Szczech - Apr 03, 2020
Review of the first Quarter 2020, what to expect in the near-term, followed by tips to weather this period.
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First Quarter 2020 – Review

There were two distinct phases to Q1 2020; the first was characterized by an equity market surging to all-time highs despite concerns about a manufacturing slowdown, geopolitical tensions and US political uncertainty. This phase quickly faded with the emergence of Covid-19 as a global pandemic, largely shutting down the international community.

Beyond COVID-19, oil prices also collapsed in the first quarter. Starting with a steady decline at the beginning of 2020 due to concerns about weaker global demand, WTI plummeted by nearly 25% on March 9th, the largest single day decline in nearly 30 years, after the OPEC+ production-cut pact fell apart due to a dispute between Russia and Saudi Arabia. Both the Saudis and Russians announced further production increases, maintaining pressure on the price of the commodity which ultimately dropped by nearly 70% in the quarter.

In response to all markets and the energy sector trading lower in Q1 2020, the Canadian government initiated several programs to assist its citizens through this crisis including the Canada Emergency Response benefit for those who have had their employment impacted by the virus, as well as various other measures.

The Bank of Canada also slashed rates, cutting the overnight rate from 1.75% to 0.25% through a series of rate cuts in March and announced an expansion of its bond buyback program to help support liquidity in credit markets. Economic concerns and low oil prices caused the Canadian dollar to drop under .70 briefly.

So, where does that leave us? Breathing a little easier.

Although we’ve just been through one of the most challenging environments of the past 100 years, with wild trading swings both up and down daily, the turbulence is subsiding from those extremes with 1-4% daily moves becoming more common. Still, these extremes are still about 3x more variable than what would be considered normal – but this is an unprecedented time.

Canadian and US economies may be less affected by the economic fallout of this virus than other parts of the world. However, this doesn’t mean that both economies will be firing on all cylinders. Corporations aren’t going to roll the dice or take any chances in this period of unknown.

Some precautionary actions to preserve capital have increased in the last few weeks, and companies in hardest hit industries including energy, retail, airlines and hotels have announced reductions in dividends. In addition, they are cutting share buybacks - which doesn’t sound comforting but will help fortify corporate balance sheets in months ahead.

There is no doubt that the financial system is in a better position to absorb a shock relative to where it sat at the beginning of the 2007-09 crisis. Corporations have adopted measures with a sense of urgency to insulate their operations from deep economic strain.

Global policy stimulus at the start of the week sat at $5 Trillion and counting, which will help with share price appreciation. Other steps to temper payroll reductions, loan delinquencies and corporate insolvencies are at work too.

How can we weather this period?

Investing during volatile times often challenges our discipline and commitment, but there are principles of our investment strategy we’ve put in place. This list is a good reminder:

  • Stay disciplined and committed to your long-term investment plan — don’t ride the emotional rollercoaster.

  • Don’t jump ship. The difference between investment success and disappointment can boil down to a few days of being in or out of the markets.

  • Take a long-term perspective. Accept that markets rise and fall but, over time, markets have always moved higher.

  • Turn market volatility into your advantage. If possible, invest a specific amount at regular intervals, dollar-cost averaging can help you buy more units of an investment at lower prices and fewer at higher prices.

  • Diversify across various economies, businesses, countries, and popular investment classes to help spread risk, remain consistent, and reduce potential for underperforming assets to impact your portfolio.

In times of unusual volatility, it’s normal to have questions, large or small. Please reach out by phone or email. We can get through this one day at a time.

Stay healthy and safe everyone

 

The information in this newsletter is derived from Dynamic Funds and Manulife Investments.