This past week is one we would like to forget. Volatility jumped meaningfully higher and stocks sold off in the worst week for global equity markets since the end of March, when the pandemic was in its infancy. The second wave of COVID continues to spread in a faster way than anticipated. The situation is particularly troublesome in Europe but is also concerning in the U.S., while Canada is faring a bit better. The market selloff is understandable as the trajectory for the global economy and corporate earnings is now at greater risk of faltering over the next few months. However, we think the situation today is sufficiently different than the winter and spring. We explain more below.
Paris has become the epicenter of Europe’s Covid-19 health crisis, with daily cases topping 50,000 over the past week. To put things into perspective, France has a similar number of new daily cases to the U.S. but only accounts for a fifth of the population. In an effort to limit the spread and rising pressure on its health care system, France announced it will re-impose a national lockdown until the start of December, and has banned all public and private gatherings. Its European neighbours are also fighting significant increases in infections with cases continuing to climb in Germany, the U.K., Belgium, Italy, Czech Republic and Spain. All are either considering or have already implemented some restrictions, but more may be needed should the trends not change soon.
In the U.S. there were roughly 500,000 new coronavirus cases over the last week. There has been a big surge in cases from the American heartland. Illinois is currently seeing the highest absolute number of new daily infections in the country. Meanwhile, smaller states such as the Dakotas and Wisconsin rank as having the highest numbers of new infections on a population adjusted basis. The latter recently set up a field hospital because of capacity constraints on the state’s hospital infrastructure.
In Canada, the trend does not appear to be as bad as some other regions. The moderation in new infections witnessed recently did not continue over the past week. Instead, the growth rate in new daily cases accelerated with the 7 day moving average of new infections sitting at just over 2700 versus the 2400 from a week ago. Nevertheless, there is some good news. The East Coast continues to see few signs of problems. Meanwhile, Quebec saw its peak in new daily cases about three weeks ago, though the number of new infections still remains the highest in the country. In Ontario, the new infection rate did rise this week. But, the fastest rate of growth continues to lie outside these big provinces, with British Columbia and Manitoba leading the way, followed by Alberta and Saskatchewan. A few of these provinces are contemplating additional new restrictions to stem the virus’ spread.
Differences versus the spring
The virus trends have understandably reignited the feelings of anxiety, exhaustion, stress, frustration, and concern that most people shared during the initial wave in late winter and early spring. Investors on the other hand remain preoccupied with the risk this wave poses to economic and earnings growth, both of which were expected to rebound in the not too distant future. That forecast is now in jeopardy as the restrictions imposed by governments in various parts of the world will weigh on growth. Nevertheless, we think the current situation is markedly different than the spring. We believe there are a number of reasons why.
More experience. While the pressure on health care systems is mounting in certain areas, the level of fatalities remains below levels seen earlier this year despite the substantially higher number of current cases. A combination of better preparedness, experience, therapeutics, and the sheltering of vulnerable people has led to this improvement in hospitalization and fatality rates.
Range of containment measures. Governments are likely to employ less draconian measures than used earlier in the year unless the situation reaches an extreme, as it has in France. Even here, we expect to see progress over the next month. Israel serves as a good comparison. It went into a nationwide lockdown nearly 5 weeks ago, and has seen its new daily infections decline by over 90%. Admittedly, it has come with a heavy economic cost.
The stability of the financial system. The financial system is much better prepared today with central banks having aggressively lowered rates and employed a variety of means to ensure the proper functioning of credit markets. Access to capital should present less of a challenge.
Government aid. Furlough programs, debt relief, rent deferrals, loans and guarantees, business subsidies, and income support are just a few of the various ways governments have stepped in to offer support to households and businesses impacted by the pandemic. We expect additional aid going forward given the anticipated impact from renewed restrictions.
Vaccines. Hundreds of vaccines are being studied and more than a handful are in clinical trials with some expected to release data in the coming months. There is no guarantee, but given the coordinated efforts by the global scientific community, we remain hopeful that a vaccine will be available for mass distribution in 2021.
The near-term has become more uncertain in the wake of the accelerating virus spread. Compounding the challenge for investors is next week’s U.S. election. Any clear and final outcome, whatever it may be, would be a welcome development for investors as it would remove one source of uncertainty. A contested outcome on the other hand, or one that remains unclear for days if not weeks, would likely add to the volatility that has already weighed on markets of late.
On a final note, we can’t help but remind ourselves of March 23rd, 2020. This date marked the low for global equity markets this year. A significant market recovery unfolded in the days and weeks thereafter. Yet, at that time, anxiety levels were high and it seemed like there was no end in sight for the spread of the virus. It serves to remind us that timing a recovery, or a setback for that matter, is nearly impossible given human emotions that often get in the way. It is also too short-term sighted. We remain focused on the longer-term needs and an investment plan that can help us accomplish our objectives. We see the prospects for less uncertainty with the passage of time.
We are pleased to share the latest investment strategy report from RBC Wealth Management: Global Insight Weekly.
Global equity selloff: Autumn of discontent?
Several forces have driven the surges of volatility that have ripped through global stock markets. While it could be a bumpy ride ahead, we think the greatest deteriorations in economic conditions and equity markets are likely in the rearview mirror.
Regional developments: Bank of Canada tweaks asset purchases, expects uneven recovery; U.S. volatility spikes may not be all bad news; UK equities: Upgrade to Market Weight; Investors waiting for China’s 14th Five-Year Plan
Don’t hesitate to contact us to discuss any investment ideas or wealth planning topics. We appreciate the opportunity to serve you and are honoured to help residents of Northern BC accomplish their long-term financial goals.