The Covid-19 Market Decline – Added Perspective
Following the significant market decline during the last week of February, and the market declines we experienced this week - particularly on March 12th - it is quite possible that peak fear/panic has been reached or is very close to being reached. But peak fear/panic is not necessarily the same as peak pessimism.
For instance, peak fear/panic back during the 2008-09 financial crisis was probably reached in late fall of 2008. The markets had indeed dropped significantly in October 2008. Looking back with the benefit of hindsight, late fall 2008 was indeed an excellent time to invest. Peak pessimism during the financial crisis was most probably reached a little later in early March 2009 (the actual ideal time to invest, with hindsight), when unemployment was spiking upwards.
In times when uncertainty is very high - this is definitely such a time - technical market indicators sometimes may prove more useful than the fluid health and economic data we are getting on a day-to-day basis. So let me point out that yesterday (March 12, 2020) (1) the CBOE Volatility Index (nicknamed the VIX- and a great market fear indicator ) reached its highest level since the 2008-09 financial crisis, (2) very few stocks went up relative to the number of stocks that went down (as measured by the Advance-Decline Line), and (3) on the New York Stock Exchange, only 7 stocks reached 52 week highs, compared to 2364 stocks reaching 52 week lows. These indicators are more typical of market lows. This is not to say that we have reached a market low. But as long as panic and anxiety do not morph into a very high degree of pessimism and massive layoffs than we may indeed be close to a market low.
Another interesting leading indicator that a market bottom may be close, in my opinion, is front page news headlines. For instance, today’s Globe and Mail front page top headline reads ‘These are extraordinary times’. Below this headline are other headlines such as ‘Canadians are urged to stay home to help stall spread of coronavirus’, ‘TSX suffers worst one-day plunge in 80 years’ (neglecting to say it was not the worst percentage decline!), and ‘Trudeau’s wife contracts coronavirus, PM in isolation’. I noticed that there were no headlines saying ’Only 15 new coronavirus cases reported in China on March 12th’ or ‘Chinese industrial activity resumes as workers go back to work’. As the old media saying goes: You Don’t Sell Newspapers Reporting How Many Planes Land Safely. My main point is that once the bad news is making front page headlines, fear and panic are at or very near their peak levels.
On a more fundamental basis - as opposed to a technical level - I listened with great interest yesterday on CNBC as Nutrient Timmer from Fidelity Investments said that the stock market has now already discounted a 10% decline in corporate profits and a four point cut on the market Price/Earnings ratio. So he essentially said the market has already adjusted for an economic decline and lower risk appetite. It remains to be seen whether this adjustment was exaggerated or underestimated.
One should hope - as some experts believe - that the stock market will start turning around once the growth rate of new coronavirus cases begins to slow down and the virus news coverage begins to decrease.
…………………………………………….
As I indicated earlier in the week, I am privileged in my role to receive very pertinent timely information and opinions from various sources. I trust that the following excerpts provide greater perspective - and possibly a calming effect in terms of the markets anyway.
“There are many unknowns but reasonable assumptions for now suggest short-term pain should eventually give way eventually to long term gains.”
“At the portfolio level, we are using big market down days to upgrade our portfolio, adding ever-higher quality long-term growth stories at significantly reduced prices.”
“We think it is likely, with time, that the public in general will notice that despite the dire and breathless news flow, most people in their circle of life remain uninfected and healthy. With this, and maybe warmer weather, the panic phase we currently are in is likely to diminish.”
Federated Hermes
March 9, 2020
“History has shown time and time again that allowing emotion to drive the investment decision making process is bad for investor’s wealth , as short-sighted and undisciplined reactions to short-term events can carry significant implications for long term performance…It is never apparent when the dust has settled. …Being in cash …meant that these investors found themselves on the outside looking in as the markets recovered…can have significant negative performance implications in the long run.”
Guardian Capital
March 9, 2020
“Markets can definitely go down further as we are headed for a recession but bear markets are the best time to buy stocks for long-term investors…We would rather buy stocks when markets are down sharply than chasing them higher as they get more expensive.”
Peter Bookkvar
Bleakly Advisory Group
CNBC March 12, 2020
“In this chaos, opportunity presents itself.”
Jeff Kilburn
KKM Financial
CNBC March 12, 2020
……………………………………………
- note that in today’s communication, I have intentionally left out any discussion of the spreading and health consequences of coronavirus; the impact of the virus on the economy, various industries (e.g. travel, hospitality), cancellations of social/work/sport/entertainment events; the impact of the virus on our behavior (today and in the future); and the response & actions of our politicians and central banks. All of these subjects are extremely important. As an Investment Advisor and Portfolio Manager, I believe timely communication about the markets -such as this one- should be a top priority given the volatility we have recently been experiencing.
………………………………………….
Finally, let me repeat the investment advice I provided earlier this week:
- 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.
Wade Brown
March 13, 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.