Market Watch, March 2020: COVID-19 and Oil Price Decline

Posted 18 Mar 2020 by Rick Irwin, CFP, CLU


Financial markets have exhibited high levels of volatility over the past several weeks as they react to factors that include reduced interest rates, a steep decline in oil prices and the economic and business implications of the coronavirus (COVID-19) outbreak. I would like to provide you with some further perspective on these developments and what the market’s fluctuations may mean for your investments in the longer term.

What are the most recent market developments?

Concerns about the spread of the coronavirus on business activity are weighing heavily on global asset markets, and central banks have moved to support the global economy with lower interest rates and other monetary policy measures. The U.S. Federal Reserve (Fed) has made two emergency cuts to its policy rate, bringing it to a range of 0-0.25%, and has announced a US$700 billion security purchase program to inject liquidity into the financial system (quantitative easing). The Bank of Canada has also cut rates twice to support the Canadian economy, reducing its overnight lending rate to 0.75%, while the G7 group of countries announced that it would be willing to use “all appropriate policy tools” to provide economic support amid the ongoing COVID-19 outbreak.

Also affecting financial markets has been a disruptive oil price war. Saudi Arabia and Russia announced plans to raise production, reducing prices in an attempt to gain market share. As the number of cases of COVID-19 surged worldwide, triggering progressively stricter government policies and business responses such as social distancing, travel bans and the suspension of professional sporting events, markets have lost considerable value.

What can we expect for the future?

Not all companies will be affected equally. Airlines and cruise lines for example will be impacted much more materially than cloud computing companies who offer software to help employees work more effectively from remote locations. Having a diversified portfolio has also helped soften the impact of the steep market decline. Managers are being opportunistic in this volatile time, in some cases putting cash to work in others upgrading the quality of the stocks they hold, selectively moving into companies they feel will have a bigger rebound potential once things inevitably turn around.

On March 16th, the US stock market suffered its worst one-day loss since 1987 and, in total, markets worldwide have fallen 30% on average from their peak. Putting it into context, the typical bear market since 1955 has seen a loss of 38% in the US* so it’s likely we are most of the way through this decline.

For some perspective, I’ve included a chart below which outlines the market’s performance over the biggest declines last four decades, as well as the 12-month return which followed. I believe it is important to keep this data in mind when the markets feel as turbulent as they have recently. For example, in 2008 the collapse of the large US investment bank Lehman Brothers brought about a decline of 25.8% in less than two weeks, which is very similar to the sharp decline we have experienced recently with the escalation of the coronavirus and oil price war. As panicked as things were then, with sharp sell off occurring, as now, with seeming regular frequency, one year after the Lehman Brothers collapse the US market was almost 23% higher and the markets had already recovered almost of all the losses. Sharp recoveries like this are simply missed once money has moved to the sidelines.

 

Bear markets are certainly not pleasant to endure but it’s important to remember that, like the coronavirus itself, they don’t last. The average bear market has lasted about 18 months while the average bull market has returned 335% and lasted for 105 months*. Now that we are in the grip of a bear market, and likely heading into global recession, it’s important to look toward the positive which is the long strings of positive returns, multiple years worth, that follow bear markets. It’s likely that most of the damage is already done and it’s important to remember that markets are forward looking and are already pricing in a recession and similarly will price in the eventual recovery and will begin to rebound even in the middle of a recessionary environment.

 

Although the situation we face today is unique to say the least (Coronavirus containment, oil price war, etc.) this type of market environment isn’t. For well-prepared long-term investors now is a time to stay the course while evaluating potential opportunities as assets become oversold. Many of the best all-time trading days come within a month of the worst trading days and missing out on a few of these best days can have a material impact on long-term performance.

How should I react?

On an emotional level, it can feel very difficult to adhere to a long-term financial plan when faced with daily volatility and a stream of negative news. It is natural to be concerned about the value of your portfolio, apprehensive about what the future will bring, and tempting to make changes. As hard as it is to remind ourselves amid such volatility, market declines are a normal part of investing. Severe corrections like the one we are now experiencing are less common but have been an occasional occurrence. Although the timing is unknown, such setbacks have historically been temporary, and stocks have inevitably recovered.

That is why it is important to take some comfort in the fact that your portfolio is diversified. A portfolio that is diversified by asset class, sector and region will have more stable returns, because not all investments provide the same returns at the same time or respond to events in the same way. A well-diversified portfolio geared toward your financial goals and risk tolerance is still the best defence against this type of volatility in the marketplace. A downturn in the market can be uncomfortable, but it’s no time for hasty actions. The key is to look beyond the short-term volatility and to envision the recovery. We have been here before and throughout history, bear markets have always been followed by bull markets that are much longer and much more powerful.

If you would like to discuss your own portfolio and how it has held up in the face of recent volatility, what managers have done to adjust to these changing market environments, or if you should be making any changes, we are always available to have those discussions.

 

Sources:  CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bloomberg Finance L.P., Yahoo Canada Finance, and Trading Economics.