March in Review

We have had the biggest single day drops since the Great Depression and understandably investors are spooked. I have clients asking me if this time is different, as the impact of covid-19 on the economy are at an unprecedented global scale.

As I reflect on the past decade, we have just lived through the longest bull market in history second only to the bull market in 1990s after the Great Depression and WWII.

There have been two great bull market rallies in history, each after an unprecedented crisis where it feels as if the world order as we understand it has changed; new rules have been written and old ones no longer apply. During the Great Depression for instance, the markets drew down over 50% and corporate profits fell as much as 90%.

The markets have gone through a lot, but always manages to muscle higher:

Source: Forbes India

What comes next and how would I know when the market correction is over?

Most of the major market indicates have retreated between peak to trough 20-30%. Taking a look at the past 11 market cycles, on average, 20% price in a mild recession and 35% a deep recession. What the markets have priced in now are essentially a mild, relatively short term recession vs. a deeper, longer term recession.

There are three key factors we need to look out for to determine market recovery:

First, it is important to see signs of peaking in global contagion rate for Covid-19 without re- emergence. This will provide confidence that the pandemic will be contained and businesses will return to normal operations. The experts leading vaccine research has put the timeline for a vaccine to between 16-18 months.

Secondly, countries have announced fiscal support measures for sustaining small-medium-large corporations. The average budget announced by countries is 2% of GDP, though given the severity of the economic impact, the first wave of announced measures are still too conservative. Singapore for instance has announced coronavirus relief package worth 11% of the country’s GDP.

Lastly, it has to do with how much of the recession has been priced in in the current markets. As mentioned previously, we have now priced in a mild and relatively short term recession, therefore, there could be further downside if the economic damage is more prolonged than currently anticipated.

A path forward with Covid-19

Since Covid-19, the global economy has faced some unprecedented challenges. However severe, the impact of the pandemic is expected to be transient. Using China as a reference point, they have implemented quarantine in late January for approximately 2months and have observed a “peak” in new cases. By analyzing the real time data gathered and tracked by Financial Times, China’s economy is showing signs of recovery

Source: FT: Tracking real time data on: Real estate floor space sales, Power plant coal consumption, Container freight, Traffic congestion, Air pollution and Box office admissions.

Here are a few things to consider for portfolio changes

First, this shall pass. Investors who invest over the long term through multiple market cycles understand this will pass. The post COVID-19 world may not be the same as the one we know but a new normal will be established along with new innovations and opportunities.

Second, when appropriate, consider some tax loss selling. If you have capital gains accumulated, consider harvesting some losses for tax purposes. Rotate into another name in the same industry to maintain exposure or wait until the superficial loss rule expires to buy back the position.

Third, do not rush into the market and leave some powder dry. While 30% is a large draw down in the portfolio and as painful as it may be, the last two recessions (2001 and 2008) market corrections were in the 50% range. It is a good time to start bottom fishing by adding small positions.

Rita Li works with individuals, business owners and healthcare professionals to provide tailored investment advice, risk management and financial planning. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with experiences at top investments firms in Canada and abroad. Rita has her MBA from Richard Ivey School of Business.