Policy update & recent market conversations

The U.S. federal government and the Treasury have intervened in financial markets in an unprecedented fashion. Further, Congress passing a $2 trillion legislation package should help bridge the economy as we move through this temporary shock. The Canadian government is also bolstering its own stimulus efforts. These actions serve as a signal to the capital markets that the government will do all that it can to keep financial markets functioning and open. In turn, the markets have been responding favourably to these moves in recent days.

 

Reflecting on many of the conversations we have had this week, there were a number of recurring points that we wanted to share more broadly:

1. Headlines around COVID-19 remain dramatic and the situation will likely get worse before it gets better. Remember, no-one can tell us how this unfolds, we are all in it together with regards to searching for real time answers.
2. In our view, the market is still currently pricing in a lot of negative news. We have had a couple of strong days on the back of optimism related to the above mentioned stimulus efforts. The moves higher on Tuesday and Wednesday serve as a reminder that the initial recovery from a bear market tends to happen quickly (more on that below).
3. It is our view that an economic recovery would likely happen faster than in prior recessions, given that this slowdown is largely a function of distancing efforts undertaken by the government to slow the spread of the virus. In contrast, the financial crisis was the product of a near-decade long excess that built up in the U.S. housing market. Today the economy doesn’t have a great deal of “excess” that it needs to work through on its path to recovery.

 

Investing through turbulent times & a word on recoveries

In times of crisis when fear permeates and investors flee equities, we typically see the market fail to distinguish good companies from the bad – the proverbial baby gets thrown out with the bath water. In our view this is where long-term opportunity lies for fundamental minded investors. Those who are willing to tolerate a degree of near-term uncertainty will be rewarded in the long-run as the price of world class franchises re-sets lower.

 

Turning to the dynamics of recoveries – they tend to happen quickly from extreme market events. The last three major market crashes - the 1987 crash, the early 2000’s tech bubble, and the Great Financial Crisis of 08/09 - were all met with significant drawdowns in equity prices (-34%, 49%, and 57% respectively). One encouraging takeaway from those past events we can apply today - it took months, not years, for the market to recoup half of its losses, and on average only a few years for markets to make new highs.

 

The below is a chart looks at the median annualized returns of the S&P 500 following 30% market sell-offs. The old adage “time heals all wounds” is certainly true when it comes to investing.

 

Source: RBC GAM, Bloomberg. S&P 500 TR (USD) annualized returns following periods of 30% drawdown.

 

A parting word

We understand these are difficult times. We are all in this together. If you have any questions or concerns, please contact us. Our entire team is available to listen and speak to you. We are also available for family members or friends who would like to be reassured.