What a long six months it's been since my last email a week ago…

 

I want first to say thank you to everyone who has reached out to us over the past several weeks. It has been busy, to be sure, but working remote is proving simultaneously very productive and quite different as we iterate our business processes to adjust to not all being in the same room together. Thankfully, we seem to have hit a bit of a groove.

 

Our primary concern at this time has been staying focused on the well being of our clients, families, and friends during this unprecedented time. We are watching developments concerning the spread (and containment) of COVID-19 around the world, as well as to the various government responses and how these are impacting our clients' portfolios.

 

COVID-19

The spread of COVID-19 continues. While Europe continues to grapple with a growing number of cases, the U.S. is seeing its caseload rise faster, particularly in certain jurisdictions like the state of New York. It has now surpassed China in terms of the largest confirmed case count. Governments around the globe have escalated their containment efforts over the past week, and it will take at least a few weeks, if not longer, to gauge whether these actions are effective. Meanwhile, measures out of Italy, which has been on lockdown for about two weeks, have yet to offer conclusive signs that infection rates in that country are starting to slow.

 

For those interested in how Canada's caseload is tracking, CTV has a great website:

https://www.ctvnews.ca/health/coronavirus/tracking-every-case-of-covid-19-in-canada-1.4852102

 

For a global perspective, Johns Hopkins University has put together an excellent data visualization:

https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

 

One observation from the above: Canada currently has less than 40% of the cases per capita as the United States does (137 per million versus 355 per million). I am certainly anot an infectious disease specialist, but I hope that this means that the early action of social distancing has given us a leg up on COVID-19. Spain and Italy, for perspective, each have over 1400 cases per million people.

 

The Government Response

On the fiscal policy front, Canada and the rest of the world seem bent on supporting their citizens during the lock-downs and social isolation orders. More specifically, many governments around the globe have announced significant measures aimed at helping the unemployed, as well as businesses, deal with a period of cash flow shortfalls. Meanwhile, central banks have leaned on lower interest rates but more importantly have adopted policies to ensure deep, easy liquidity and proper access to credit for businesses, large and small. Canada just yesterday lowered its benchmark rate to 0.25% (from 0.75%). The income-replacements in Canada and the U.S. are healthy and should hopefully keep people out of the worst of it, as should the pauses being implemented on things like student loan payments and some other debts. Trudeau yesterday morning increased the wage subsidy to keep workers employed up to 75% of salary, and banks now have access to $40,000 forgivable, government-backed loans for small businesses, with $10,000 of that forgivable if conditions (like maintaining employment) are met.

 

Remi Laurencelle in my office has written an excellent summary of some of the more specific moves that the Canadian government and governments around the world have done to try and bolster their economies as they move through COVID-19 lockdowns. It can be found on our blog, along with other commentary by ourselves and other RBC groups:

https://ca.rbcwealthmanagement.com/samuel.mclaughlin/blog

 

What comes next

We are currently in what can't possibly be classified as anything but a deep recession. Over the next weeks and months, investors will need to steel themselves: economic data is going to deteriorate at levels that will at times seem without precedent. In Canada, unemployment claims rose to over a million people, representing 5% of all of the employees in the country. The U.S. jobless rate rose 3.28 million in just the past week, which is up 11.7x over the week before. Stock markets are forward-looking, and the news seemed not to have any effect of stock prices, likely because they had already anticipated the news in the weeks before.

 

There are two competing futures for what all of this leads to:

 

In the more optimistic scenario, we lock down the economy for some reasonable period and actually get things under control to the point where contact tracing and continued heavy testing allow the rest of us to get back to work. The world writes off at least two quarters of GDP growth, maybe more, but the economy restarts. Unlike in a war—where factories and infrastructure are destroyed and masses of people are killed—the factories are all still there and waiting to produce. And unlike a financially-driven recession (like 2008), there aren't mass layoffs and downsizing; if you had a job before the lockdown, you likely have one waiting for you when things reopen. If this turns out to be the path, we might envision a v-shaped recession, where recovery could happen quickly (though there will be massive money moving around between industries). Individual companies and people will be affected, but the economy writ large is ok. Markets are forward-looking, and if productivity was expected to rebound, stock prices should move up in anticipation of recovering earnings.

 

In the more pessimistic scenario, the handling of the virus continues to go badly and we either end up in lockdown for a very long time, we end up opening too early and seeing a resurgence that then needs to be handled, or we see hospitals overwhelmed and unable to adequately care for people. This then causes more damage to the economy, and in a worst-case scenario the damage becomes structural—instead of a rebound, we would be looking at an ever deeper recession, and a u-shaped recovery more like 2008. That time, economies took quite a while to finally recover, and when they did it was from a weakened base that needed to be fixed before real growth could happen again.

 

Which outcome we get will depend on, unfortunately, the externalities of government policy, public actions, and the virus itself. That said, I am hopeful that we are at least starting to do the right thing in countries around the world, including in Canada. The critical question remains whether the measures that have been taken – and may yet be taken – by governments and central banks are meaningful enough to limit the economic hit to a period of months and a mild recession versus something deeper and longer.

 

What to do today

Facing such uncertainty, what should an individual investor do? We continue to expect high levels of volatility in the near term until clarity emerges on the potential containment of the COVID-19. As I have always said, the best thing to do in easy markets and in hard ones is to have a plan and to stick to it. We remain disciplined in our long-term investment approach and continue to have confidence in your portfolio. The investment quality upgrades we made at the start of the year, as well as the equity exposure we took off the table at the end of 2019 and beginning of 2020, have definitely helped. Using that good fortune, we are concentrating now on shifting the portfolio around to companies that weather this well and perform well in the economy we think we are coming out into on the other side.

 

A couple of administrative items

• With all staff including the back office now working remotely, it is advisable for you to ensure that we have current banking information on file for you, as we can’t produce physical cheques at this time. Should you need funds from your accounts, we can have them sent electronically directly into your bank account.
• If you would like to send funds to your investment account, we have several methods of doing that, including through DS Online, as a bill payments, and via the newly-implemented “reverse bankwire,” which allows you to authorize us to transfer a specific amount directly from your bank account to your investment accounts.
• Tax forms such as RRSP contribution receipts and T5s have mostly been mailed by now, but many accountants are also working remotely.  If we don’t already do it for you, we can send your RBC DS tax package to your accountant directly if they aren’t accepting paper tax slips.

 

Our job is to respond to your questions, so please feel free to call me directly (204-510-9479) or email me (samuel.mclaughlin@rbc.com) regarding our thoughts on the economy and the markets, your portfolio positioning, your financial planning, or anything else. It is a disconcerting time for many investors, and we would be pleased to also be a resource for any of your family or friends who are concerned about their own current planning and positioning.

 

Enjoy the rest of your weekend,

 

Sam