• In the short term, waning momentum of positive good news on COVID-19 has left equity markets trading in a range.
• Markets never go up in a straight line, and are unlikely to recover from this shock in that fashion either.
• Volatility is completely normal coming out of recessions, and we should expect it going forward, even if it is a bit more uncomfortable than we would like at times.
• Markets historically bottom 4-6 months before a recession is over and when the news is most dire – recall the topic du jour in 2009 was the nationalization of the big U.S. banks.
• RBC Economics expects growth to return by the fourth quarter, putting markets in the strike zone where the major indices may have already seen their lows.
• Should market volatility persist in the short term, we believe such a correction would prove to be a buying opportunity, setting investors up to generate return in the long-term.
• There are many great businesses whose recent price pattern looks nothing like the broader market and would present compelling long-term opportunities at prices commensurate with a market correction.
• Maintaining a level head is paramount in order to seize the opportunity to set up portfolios to prosper over the long term.

It has been three weeks since we published our blog post “The Waiting Is The Hardest Part”, which discussed the coming lull in actionable data on the COVID front, as success on re-opening economies is more difficult to measure than daily case counts. Since that post was published, markets have been in a holding pattern of sorts, trading in a range as market-moving newsflow abates. While the sharp run up off of the panic lows was certainly satisfying to those who had endured the unprecedented moves of March, markets don’t ever go up in a straight line and pauses (and even temporary reversals) in trend are to be expected.

Volatility has increased…

Volatility has picked up this week as we have seen mixed success on reopening efforts along with warnings from government officials regarding opening up too quickly and sparking another wave of infections. Good news from places like New York has been balanced by setbacks in South Korea, previously a beacon of light to those looking for a COVID success story that didn’t include a broad lockdown. With expectations at rock bottom in March, it was much easier for markets to react to any morsel of good news. Now that the initial shock has worn off, the uneven recovery out of recession is likely to be mirrored in market behavior, as has been the norm when emerging from recessions of the past.

…but there is reason to believe the worst may be behind us

We learned a long time ago to never say never, but we are optimistic that the market’s low was put in on March 23. Markets tend to bottom when news it at its worst, and as we all remember things were quite grim, with the virus seemingly spreading out of control in some of Europe’s largest economies while fixed income markets were in disarray. Markets tend to bottom 4-6 months ahead of recession’s end, and with RBC Economics forecasting a return to growth in the latter part of 2020, the timing certainly matches up.

Long-term investors need to be prepared to seize opportunities that may arise

We don’t know what will happen in the short term. Today’s environment is as uncertain as we have ever seen it and there are catalysts that have the potential to move markets sharply – in both directions. Should markets give back some of their recent gains, we think investors need to be prepared to lean against the grain and increase equity exposure. As we noted last week, there are wide divergences in sector performance, with large technology and health care stocks responsible for the bulk of the market’s return. Outside of that realm there are number of great businesses that have not moved meaningfully off their lows and would provide compelling value should they revisit those levels.

We can tell you in advance that should this opportunity arise it will not feel comfortable at all to do so, as confidence will be shaken and the headlines will be frightening. It is at these times, however that securities tend to be priced for a bleak outcome, increasing the odds of future success should the worst not come to pass. It is one of the most difficult things in investing to do, but maintaining a level head in those situations is paramount in order to seize the opportunity to set up portfolios to prosper over the long term. After living through a number of corrections and bear markets in our careers, we can’t recall ever thinking to ourselves “I wish I had panicked more”.

The Harbour Group

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