Market volatility and economic uncertainty have increased this week due to concerns over coronavirus (COVID-19). The equity markets have reacted sharply to the number of cases hitting 80,000 and new cases in Europe, South Korea, Japan and Iran over the weekend. We had seen the number of COVID-19 cases in China level off in the last couple of weeks, which was good news, but this recent acceleration has increased the risk of a potentially longer and more severe disruption.

 

Random shocks, such as pandemics, are by their very nature impossible to predict. With fears about this particular outbreak running rampant, it is easy to get overwhelmed by the headlines.  As there is little visibility around the duration or severity of the outbreak, we wanted to share some information and our thoughts on the implications for markets and the economy.  Prior to the COVID-19 virus, global economic growth was showing signs of recovery and trending up due to growth supporting measures by policymakers and continued stimulus.  EPS revisions had been improving into 2020.  RBC believes that given the constructive economic developments prior to the outbreak, the global economic recovery will be delayed and not necessarily derailed. However this uncertainty leads us to be vigilant and we will continue to monitor the economic data and progression of the outbreak.

 

It is worth noting that the S&P 500 has had many corrections since the bull market began in 2009. At the time, many of these felt like the start of a bear market but really became opportunities to deploy capital at more attractive valuations.The following table shows S&P 500 corrections near or greater than 5% over the last 10 years.

SOURCE: RBC PAG

 

Typically, during corrections, you benefit from being invested in high quality bonds and high quality, dividend yielding stocks. Over the past 12 months this has been our investment focus, as we recognized we were in the later stages of the business cycle. We will continue to monitor and make changes as required in our discretionary mandates.

 

During times of volatility and uncertainty it is important that your asset mix is aligned with your goals, time horizon and risk tolerance. We spend a part of each of our meetings with our clients reviewing these important items, to ensure that you are investing comfortably for the long term and can weather these kinds of market pullbacks. We have written several blogs on these topics and include them here for your reference:

Staying the course through market volatility

Volatility is back: Why asset allocation matters

 

For further reading on the coronavirus and it's impact to markets please read:

RBC Global Asset Management: Insights on the recent market action

RBC Wealth Management: Coronavirus contagion concerns

RBC Economics: Gauging Canadian coronavirus supply chain vulnerabilities

 

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