I hope that you and your family are staying safe and well as our fight against the Coronavirus continues. As we enter the month of May, I would like to share an update on our views at RBC Wealth Management on coronavirus trends and the plans to reopen economies. With April now in the rear view mirror, let’s also reflect on how the markets recovered so sharply over the month. Most importantly, we remind investors to not let emotions get in the way after such a rebound. Rather, staying disciplined and sticking with the investment plan and process is just as important in recovery as it is during the depths of a crisis, while there continue to be some compelling opportunities to take money off the sidelines and put it to work.
Progress. That sums up the covid-19 situation this past week in the developed world. At a high level, the number of new cases in countries such as Canada, the United States, and across Europe continue to trend lower. Even within the hardest hit provinces of Quebec and Ontario, there have finally been signs of slowing new cases. The same can be said across the border in the U.S., where most states have reported lower new daily cases. The situation remains very worrisome in long-term care homes, where the mortality rates have been higher given the more vulnerable population. Aside from case trends, one issue that has potential to resurface in a negative way is geopolitical tension between the United States and China, as rhetoric around the source and handling of the virus appears to be escalating.
Economic reopening plans
There have been notable developments in Canada and the U.S. this past week. Our Prime Minister and the premiers released a list of common principles in each region for restarting the economy, including among other things: stability in number of hospitalizations and new cases, sufficient capacity to test, trace, and isolate an infected person, workplace protocols such as protective gear, and coordination of non-essential travel. There is an acknowledgement that each region faces unique circumstances and is likely to need different actions at different times. We have seen a few provinces begin to modestly lift restrictions, others are exploring industry specific guidelines, and some have unveiled phased approaches that are set to begin over the next week. In the United States, the process is further along, as some states whose citizens have been less affected by the virus are eager to get back to business more quickly.
What a difference a month can make. The month of April was one of the best on record for global equity markets – a sharp contrast to the month of March which was one of the worst. Equity markets are still down from their highs earlier this year, but the recent recovery has been nearly as staggering as the decline. How can this be? Unemployment has soared by millions and activity has basically ground to a halt. Most people understand that this recession is a self-inflicted choice made by governments to prioritize the health of people over the health of the economy, so investors are looking beyond the dire economic headlines, believing that central banks and governments have bought enough time with significant support for consumers, households, and businesses. The hope is that as economies begin to gradually reopen through May and June, we will see a sharp acceleration in economic and earnings growth as early as this summer.
Lessons learned and managing emotions
There are important lessons to be learned through this experience. First, markets are forward looking, and reflect the anticipation of what is expected to come, not necessarily what is happening right now. And second, when investor sentiment reaches an extreme, both negative and positive, it may not take much to change the trend. More specifically, there’s a point at which bad news no longer drives market prices lower. Moreover, news that is simply “less bad”, not necessarily “good”, can actually lead to increases in stock prices as investors who have become accustomed to negativity begin to shift their mindset.
Just like after the significant decline in March, we want to emphasize the need to manage emotions and stay disciplined and remain focused on long-term outcomes. While there is still work to be done, we are hopeful that we are past the peak of this health care crisis and we can now shift our attention to the economic and earnings recovery as the light at the end of the tunnel begins to get brighter. But, it may not be an easy path forward. We expect some ups and downs along the way as uncertainty is likely to be higher than normal, risks of additional outbreaks remain, and social distancing measures will still be required for some time.
In the meantime, we continue to watch developments closely as we stick with our investment process and manage our clients’ portfolios through this unusual time. If you have any questions or if you would like to talk about the outlook for your investments feel free to call or email me. I sincerely wish you all the best.