It may be difficult to focus on the outlook for financial markets when the welfare of our clients, family, and friends is top of mind. Nevertheless, putting events that affect the markets into perspective is an important responsibility of ours – in good times and bad. As a result, we wanted to share our key thoughts on the current situation and how we intend to approach the days, weeks and months to come.

Coronavirus

The spread of the coronavirus has been the source of significant market volatility over the past month. The only proven way to slow infection rates is through social isolation and quarantine. It’s been a successful approach employed in China and South Korea. Encouragingly, we’ve seen a slowing rate of new infections across countries such as Italy, Spain and Germany, among others that have been effectively in lockdown for weeks. To be clear, there are still new infections being announced daily. Unfortunately, many people are still losing their lives every day. But the rate of change is improving and this potentially bodes well for the weeks to come. The hope is that North America will also experience this relatively soon. There have been some early signs in the state of New York, the epicenter of the crisis in the U.S., that suggest new cases may no longer be accelerating at the pace of a week ago. More evidence is needed nationally and across Canada to confirm that an improving trend is indeed in place.

Energy

Another factor at play has been the sharp decline in oil prices as a result of weak demand from the global economic shutdown and a standoff between two of the world’s largest oil producers: Saudi Arabia and Russia. It’s hard to predict an outcome for the latter given its political nature, though a new agreement could come very soon according to various press reports. The implications are important for Canada as any extended period of low oil prices will hurt our economy and our market, both of which depend on the industry. Furthermore, the bond market is watching closely as investors have grown concerned about the ability of some companies to repay their loans should prices remain depressed.

Government response

Governments and central banks around the world have responded aggressively, with quick action that is both bigger in scale and more diverse than what was seen during the great financial crisis over a decade ago. Many have announced significant fiscal measures – from emergency loans, to tax relief, to wage subsidies and direct payments – to help alleviate the pressures that consumers and businesses will face over the weeks and months to come. To date, the Canadian government has announced direct support to the economy amounting to $105 billion (nearly 5% of our country’s annual economic output). We all likely know someone whose job, education or business has been, or will be, impacted by the current economic difficulties. As a result, the government has created Canada’s COVID-19 Economic Response Plan, which is a collection of diverse measures to help households, consumers, students, parents and businesses.

Meanwhile, central banks have sharply lowered interest rates but more importantly have undertaken a variety of actions, including coordinated policies, to improve liquidity conditions and ensure that businesses have proper access to credit should they need to borrow money.

Exit strategy

An important development occurred recently in the Chinese city of Wuhan, the original epicenter of the coronavirus crisis. Officials there lifted the lockdown that had been in place for 76 days. This is a meaningful milestone. But it also represents the beginning of a new chapter in this saga, namely one of recovery. And with it come many questions that are likely to weigh on the minds of most citizens, households, business owners, investors and government officials. What does life look like after a peak in this health crisis? Does everything reopen at once? What restrictions, if any, are still needed? Will people’s behaviour be any different? Does economic activity bounce back sharply or gradually? In some ways, this is a concern for another day as we are still in the middle of a serious crisis, where the welfare of our family, friends and clients are top of mind. But these are questions that equity and bond markets will have to grapple with in the not-too-distant future.

Implications

A few weeks ago, volatility was extreme and markets were selling off sharply. More recently, volatility, while still elevated, has moderated and equity markets have retraced some of their losses. This has happened despite terrible economic data that has illustrated the extent of the global shutdown. It has served as a good reminder that markets tend to be forward-looking in nature. While the data is likely to remain poor and even worsen in the weeks to come, investors have grown hopeful that a peak in the healthcare crisis may be near and a return of economic activity may be on the horizon by the summer. But much uncertainty remains given the exit strategies discussed above that remain unknown at this point. As a result, we continue to brace for volatility to remain elevated in the months to come.

Our approach

In our experience, basing investment decisions on extreme scenarios and trying to make large portfolio shifts in today’s environment of outsized daily price moves is very challenging. It may be too focused on the short term and may do more harm than good given the increasing intervention by policymakers designed to contain the virus, stabilize the economy, and eventually reignite growth. Past experience reminds us that market declines often end in a climactic fashion. But no one has the ability to accurately predict exactly when that will be.

We are committed to remain disciplined in our investment approach. This means: focusing on your long-term objectives and ensuring your portfolio is properly structured to deliver your required long-term outcomes. To accomplish this, a few measures we may undertake in the future include:

• Rebalancing of positions across your portfolio
• Harvesting tax losses where appropriate
• Undertaking due diligence and reviewing all holdings to ensure quality
• Opportunistically adding to existing or new positions that meet our criteria should prices become excessively cheap

We believe these actions will help us ensure we continue to have the most conviction in your portfolio and its ability to help you achieve your objectives over time.

Should you have any questions or concerns, please feel free to reach out.