Market Update - March 2020

Market Update - March 2020

Well, this was certainly an interesting way to end RRSP season. The last week and a half in the market has been one for the history books. Not only have we seen the largest 1 day drop in the Dow Jones Industrial Index history, but also the largest 1 day point increase. Canadian and U.S. Stocks experienced a substantial drop on increasing concerns that the COVID-19 outbreak will be labeled a global pandemic and will continue to spread at a rapid rate. Even as new cases in China slow, the fear and uncertainty in the market continues to build with rampant media reporting of the virus spreading in Iran, Italy, South Korea and the U.S.

The major concern is that the COVID-19 virus could have the potential to impact the global economy. This fear has resulted in a large market sell off that has seen most asset classes take the heat. Not even the bond market has been immune to these concerns.  The market has resulted in a yo-yo of types, rising and falling, day in and out, while the central banks try and surge the market by lowering interest rates.

I think that right now there is a lot of uncertainty about the situation. It may be many weeks until we have a better idea of how this could impact the market long-term. Some experts think that this may have a shorter timeline and that markets may recover in the later quarters of the year, while others think this may have longer term implications.

The important thing is how you, as investors, react to news of market volatility. History has shown that making emotional decisions during periods of market uncertainty can lead to prolonged losses. Many investors will try to time into the market to avoid risk/see gains or sell out of the market to try and reduce losses, however these timing maneuvers rarely work to one’s advantage. These reactions can negatively affect your long-term goals and financial objectives. The best advice I can give is to keep your investing behaviours the same. Continue to make your monthly investment allocations throughout the ups and downs. Once we have seen what we think is the bottom, that is the time that we may re-balance your investments tactically. Keep a long-term perspective on your investments to see past short-term volatility.

Here is brief breakdown about what specific sectors have been seeing:

United States

While the U.S. economy may be the least vulnerable to the potential economic fallout of the virus, this doesn’t mean the economy won’t suffer its ill effects. U.S. fourth quarter GDP growth was reported at an annualized rate of 2.1%, which is irrelevant to the situation as of February 27. Manufacturing activity that showed a modest rebound in January is expected to contract in February.

Energy & Oil

Considering the uncertainties surrounding the coronavirus’s impact on the economy, there is less doubt on its impact on energy prices. The International Energy Agency (IEA) has slashed its Q1-2020 global demand forecast by 1.3 million barrels per day–and if correct, it would be the first year-over-year drop in demand in more than a decade. China accounts for more than three quarters of growth in global oil demand according to the IEA.

Europe

Where some European countries have closer economic ties to China and noting the increasing number of coronavirus cases in countries such as Italy, the economic consequences may be like what Asia will experience. Heading into 2020, European Industrial Production was slowing in reaction to an already slower Chinese economy. In fact, since global exports were still straining from the U.S./China trade disputes in December, the current supply chain disruptions will only delay the recovery. Therefore, any rebound in Europe will depend on a rebound in China.

Market corrections

Corrections, a drop in equity markets of greater than 10%, are fairly common. Bear markets, a drop in equities of greater than 20%, are usually more associated with recessions. Not to suggest the current market volatility is attributed to a pending recession. It’s unlikely there’s enough evidence of such an economic consequence at this time. And therefore, it’s not suggested the current volatility will materialize into a definitive bear market. At the same time, the “buy the dip” mentality that has permeated the market over the past number of years warrants some caution. The current economic and market conditions demand careful consideration.

The volatility in this case could be considered a combination of sentiment and fundamental drivers. The coronavirus is both catalyst and cause to the market volatility and unlikely to subside in the near-term. To buy the dip and increase risk assets in a portfolio may not be wise until there’s more confidence in the future economic and earnings environment.

In hindsight, a balanced posture ahead of the current volatility was a prudent approach to asset allocation and remains so in light of the economic environment, and until we see signs of improvement.

We will most likely continue to see vast market swings in the upcoming weeks as the market tries to make sense of non-stop media coverage. If you want to come into the office for a review or have a phone conversation about your concerns, please do not hesitate to reach out to me. That is what I am here for.

Sincerely,

Nicole Rothe BSc, CFP®

Financial Planner, Manulife Securities Investment Services Inc. | Rothe Wealth Management

The opinions expressed are those of the author, Nicole Rothe, and may not necessarily reflect the views of Manulife Securities Investment Services Inc.