The COVID-19 Market Correction – What should an investor do?
Well does anyone miss last year yet? 2020 has certainly gotten off to a wild start.
I believe the following investment advice is appropriate for most investors:
- Resist the temptation to do something drastic that could have negative long term consequences, such as sell your investments and switch to cash.
- Realize that since stocks are lower than they were six weeks ago, the average investment portfolio is actually less risky today than it was six weeks ago. The lower stock prices may even be creating good buying opportunities.
- If you own balanced mutual funds or have a discretionary balanced portfolio, recognize that your investment manager may actually be making small changes to the portfolios in light of the current market consequences. For instance, lower stock prices might lead to a rebalancing of the portfolio.
I would also like to offer the following perspective.
In six months from now, I am relatively confident that
-we will know a lot more about the virus. Some of our behavior may change, but for the most part, we will have returned to our normal lives.
-economic activity will be back to normal for most industries.
-as is almost usually the case in times of market declines, we will look back to see there was outflows from equity mutual funds and Exchange-Traded Funds in March 2020 but there would have been increased buying from some very large institutional investors, investment professionals, and company insiders.
In five years from now, I am also quite confident that
- the stock market will be higher than it is today.
- the health sector may have produced significant developments – partly due to efforts to combat the coronavirus.
-we will also know whether the market recovery from the Covid-19 market decline was a sharp one (think of the letter V) or a more gradual one (think of the letter U)
- we will know whether the recent price declines were proportional to the worsening fundamentals
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In our role, we are privileged to receive very pertinent information and opinions from various sources –sometimes even too much information and opinions! I thought it would a good idea to pass on to you some of the more useful and/or interesting information, opinions, and analysis I have run across over the past three tumultuous weeks.
What does RBC have to say about the recent the COVID-19 Market Correction?
“This is not the first global challenge society has faced and overcome. We’ve experienced a number of challenges before and managed through them successfully. And we will again.
It is important for us to maintain perspective and listen to evidence-based information from our world health experts even though it’s hard at times to cut through the clutter of information”
Dave McKay
President & CEO of RBC
March 9, 2020
“As with past health scares (i.e. SARS, Swine Flu, Avian Flu, Ebola) we expect the economic shock to be short lived….Valuation risk in equities has been reduced as a result of the latest sell off….Although a wider range of potential outcomes are possible in the near term, we believe the longer-term impact on corporate profits should be minimal. In our view, the negative impulse on the economy from COVID-19 is material but will likely be short-lived and not enough to send the global economy into recession…..As a result, we added one percentage point back to our equity allocation at the end of February, sourced from bonds. Our current recommended asset mix for a global balanced investor is 59% equities (Strategic:’neutral: 55%), 39% bonds (strategic ‘neutral’:43%) and 2% in cash.”
RBC Global Asset Management
Covid-19 outbreak shocks economy and markets
March 4, 2020
“Each and every year there will be negative economic, financial, or political events that give investors reason not to invest. But these events often only have a short term impact on markets.
Over the long term, markets have been resilient and remained on a steady upward course.”
RBC Global Asset Management
There will always be reasons not to invest
March 4, 2020
“If the U.S. economy avoids a recession in 2020, by year end, we expect most stock markets will have advanced meaningfully from today’s level.”
RBC Global Asset Management
Equity market brief: Under Pressure
February 28, 2020
“Given the constructive economic developments prior to the coronavirus outbreak, our view is that the global economic recovery has been delayed, not derailed.”
RBC Wealth Management / Asset Allocation Committee
February 26, 2020
In addition to RBC’s views, I would like to share the following views from Fidelity and CI Investments.
“To stop this virus outbreak we must TEMPORARILY stop or slow the movement and gathering of people. The markets therefore will price in a temporary reduction of economic and profit growth. Fear will TEMPORARILY dominate the markets. In short, this is a TEMPORARY problem.
The stock market will hit a bottom before the economy. The only way to truly take advantage of any crisis is to be opportunistic during the storm (especially temporary storms). Investors that wait for this virus to be under full control will lose this window of opportunity.
Will this be a V- Shape or U-Shape recovery? No one really knows plus it doesn’t matter if your time horizon. is 24 months or more…
The crisis will come and go, but high-quality growing businesses will survive and rebound from this situation. Potentially with even lower interest rates than before the crisis. This is bullish for long term investor. Offense is your best defense. At the very least, it’s time to rebalance.”
Fidelity Investments
Fidelity’s Current Thoughts on the virus & suggestions for opportunistic investors
March 3, 2020
Time will tell how valid is Fidelity’s approach, but I nevertheless thought it was worthwhile sharing.
“Should I make any changes in my investment portfolio? Investors should consult with their financial advisor …however we typically do not recommend making any changes unless your financial objectives have materially changed. Corrections are a natural part of the investment cycle and over the long term, investors who stay invested and use volatility as an opportunity to buy are rewarded.”
CI Investments
Coronavirus update
February 28, 2020
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INTERESTING TIDBITS
In a recent Bloomberg study covering U.S. stock market performance over the past 40 years after a major epidemic or outbreak, it was observed that the 6-month change and the 12-month change following the start of the epidemic/outbreak typically (but not always) provided above average returns. For instance, the average S&P 500 12- month % change following the start of an epidemic or outbreak was + 13.6%
Source: First Trust Portfolio Canada
Epidemics and stock market performance
According to a study of S&P 500 trading data since 1928 by Alon Zieve (See Seeking Alpha, March 6) , the recent drop in late February was the fastest time in which the S&P entered correction territory (defined as a 10% or more decline from a recent high), taking a mere six trading days in which to do so. On the positive side, he also found that generally, the faster a correction was triggered the faster the low of that correction was hit, and the market began to climb again.
Even the good years have dark days.
In Canada, 60% of years since 2000 have experienced of declines of 10% or more. In the U.S., 70% of years since 2000 have experienced declines of 10% or more.
Source: RBC Global Asset Management
In the U.S., based on the frequency of occurrence since 1950, declines of 10% or more occur about once per year. Declines of 15% or more occur about every four years, and declines of 20% or more occur about every six years.
Not that I have been able to verify it, but I would guess the frequency of these declines has been even greater in Canada.
Source: Capital Group
In another study from Bloomberg covering the 1988-2019 time frame, it was found that for both Canada and the U.S. the best and worse trading days happen close together.
Source: CI Investments
Market Volatility & What to do: The Importance of staying Invested
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INTERESTING QUOTES regarding the Covid-10 outbreak, ranked from latest to oldest
“The corona virus is different. It is already far more widespread than SARS and has killed more people, but it appears to be much less deadly.”
Editorial
Globe and Mail
March 9, 2020
“Around the world, there have been 108,000 reported coronavirus cases in more than 80 countries, with 3,662 deaths, most of them in China where the outbreak began. More than 60,000 people are said to have recovered…..For most people, symptoms are mild, including a cough and fever.”
Jeffrey Jones & Andrea Woo
Globe and Mail
March 7, 2020
“…humans have a seemingly infinite capacity to adapt to everyday, routine horrors. New threats scare us silly, but the well-entrenched, every day threats, not so much. We know from history that the way most epidemics end is that fear winds down and people return to their normal lives.”
Andre Picard,
Globe and Mail
March 7, 2020
“According to the virus dashboard run by the John Hopkins University, the growth rate of the coronavirus cases has already slowed markedly in China, suggesting the strong containment measures are having the desired effect.”
Ian McGugan
Globe and Mail
February 26, 2020
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Wade Brown
March 9, 2020
Disclaimer
The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof.
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information.
