Random shocks such as pandemics are by their very nature impossible to predict. With fears about the coronavirus outbreak running rampant, it is easy to get overwhelmed by the headlines. Nevertheless, with little to no visibility on how this outbreak will eventually play out, we wanted to share how we are currently thinking about the situation and its implications for portfolio strategy.

Over the past week, the fear of the COVID-19 coronavirus spreading within North America has triggered a 12% correction in equity markets. With previous health scares the impact on the markets was short term and we witnessed a rapid recovery. Public Health officials predict we may be in for a longer haul this time.

Prior to the outbreak of the coronavirus the market had existing risks given extended stock valuations and being late in the economic cycle. Many strategists have now decreased their earnings expectations for S&P500 companies. RBC Capital Markets conducted a stress test and in this scenario estimates S&P 500 earnings at $170 per share, which is $2 lower than before the spread of the coronavirus outside of China. Ultimately, the outcome will be based on how people, businesses and governments respond.

Our view remains that from an economic perspective, the disruption should be minimal. RBC GAM is now forecasting global economic growth of 2.9% versus 3.3%, so a 0.4% hit to annualized growth. While not negligible, at this time these expectations are mostly though not entirely attributable to the damage to China’s economy rather than expectations of a prolonged or deepening hit to global economies. That said, we remain watchful for further signs of contagion.

We would expect higher quality, income producing investments will be in more demand during this period. Our portfolios are constructed with these types of markets in mind. They consist of high quality dividend paying stocks and high quality bonds. Couple this with a well thought out Asset Allocation strategy that matches your risk tolerance and investment objectives and we are provided with peace of mind as we work through this market volatility.

In this past weeks RBC Insight Weekly with the feature article "A Week for the Record Books", they conclude with:

“Gut check - There’s simply little precedence for these types of events. The best case is that the coronavirus fears fade as quickly as they appeared. But as long as the underlying U.S. economic fundamentals remain intact, we still anticipate most equity markets will finish the year in positive territory. Staying invested is often the best strategy, and that is likely to remain the case. But more equity market volatility—in both directions—and a period of consolidation could be in store in the months ahead.”

It is also worth noting that the S&P 500 has experienced many corrections since the bull market began in 2009 (see table below for S&P 500 corrections near or greater than 5% based on price returns). Some of these episodes probably felt like the start of a bear market at the time, but they eventually turned into opportunities to deploy capital at more attractive valuations as economic and earnings growth returned to trend. As long as our U.S. recession risk assessment remains benign, the latest downdraft in equities could yet turn out to be such an opportunity.

Source: RBC PAG

 

We have written blogs on these topics:

Shorer Wealth Management Blog: Dividends

For further Resources on the coronavirus please read:

RBC Economics: Gauging Canadian coronavirus supply chain vulnerabilities