360 Private Wealth Management: 2020 Q1 Market Update

“No Tree Grows to the Sky”

 COVID-19 and Recent Market Volatility

 I will begin this post with the last couple paragraphs of my 4th Quarter 2019 Market Commentary posted in January, 2020 because I am relatively confident not everyone took time to read it back then:

“Looking forward

In 2020, the fate of the longest economic cycle in history will likely depend on a continuing low interest rate environment and renewed economic expansion. It bears repeating though, that a positive economic environment doesn’t necessarily translate into above-average investment returns over shorter timeframes. The capital markets are forward-looking and the likely theme for 2020 is show me, since most of last year’s returns were driven by the expectation of very strong company profits in 2020. There are concerns company profits will be able to match those lofty goals, so investors would be very wise not to base this year’s return expectations on last year’s returns.

Investors would be prudent to consider their income and capital needs through the next 12 to 24 months and move the money required to more stable investment options. Further, investors should revisit their risk capacity and tolerance, making sure their asset allocation mix reflects their ability to withstand near term portfolio volatility. There is a case to be made as well for holding some cash equivalent investments in portfolios to take advantage of any opportunities that may present themselves.

Remember “no tree grows to the sky”! As much fun as this has been over the last number of years, in the world we live in things can turn on a “tweet”!”

That is what I was saying in January after the year everyone experienced in 2019. Everyone who has taken time to meet with me over the last couple of years knows that I felt markets were getting ahead of fundamentals and that risk in the markets was increasing… I told clients looking to invest additional lump sums into market-based investments from mid-2018 through 2019 that the plan should be to hold back cash to average down in the event a market pull-back occurred…

 2020, so far

 A significant market pullback has occurred. Investment markets around the world find themselves in bear market territory for the first time since 2007. The drop in equity valuations has been swift and broad-based. Why?

 Investors didn’t pay a lot of attention to news of the coronavirus in the early weeks of this year. At the time it seemed like largely a China problem. That changed when large numbers of cases of the virus were reported in Italy. Investors suddenly sat up and took notice and started looking at the potential financial risks associated with the outbreak as it continued to spread. It is evident the COVID-19 (novel coronavirus) outbreak is having near-term economic consequences which will weigh on companies’ financial results. Investors are now pricing in the risk cases of the infection will continue to expand around the world into equity and fixed income investments, driving stocks and commodities lower and government bond prices higher. 

 The S&P 500 Index, S&P/TSX Composite Index, and MSCI EAFE Index are all down significantly from their recent highs. Commodities such as oil and copper have fallen dramatically from their respective highs as well (oil for additional reasons beyond pure economic fundamentals). Bond markets that had been pricing in risk since before the start of the year rallied with the yields on U.S. 10-Year Treasury Bonds hitting a new all-time low. Balanced portfolios containing a mix of stocks and bonds have experienced declines to be sure. That said, bonds have provided something of a shock absorber to most investors as the rise in bond prices offset, at least somewhat, the decline in equity prices.

 Before the news of the coronavirus, we felt a mid-single digit or below-average return with modestly higher risk was in the cards in 2020. Equity markets were (still are???) overpricing earnings growth expectations that were highly unlikely in the first place. Now, markets are faced with the economic disruptions of the coronavirus on both supply and demand as consumers limit their spending, travel less, spend more time at home, etc. This only increases the uncertainty around stock valuations.

 On March 9, 2020, markets fell mainly on the news that Saudi Arabia intends to increase oil production and offer deep discounts on its production to clients across Asia and Europe. This news comes as a breakdown in talks occurred last week between OPEC members and Russia, where Russia backed out of its commitment to cut production meant to support the price of oil. Both Saudi Arabia and Russia look as if they’re going to produce as much oil as possible, which isn’t particularly good for either side. If this path continues it would flood the market with oversupply, leading to a full-blown oil price war.

 Markets continued lower through the week, on the perception that governments and central banks aren’t doing enough to blunt the effects the COVID-19 virus might have on the global economy. The recent U.S. Federal Reserve and Bank of Canada rate cuts (50 basis points each) have not had much effect on the selling that has been happening in equity markets so far. We expect further central bank rate cuts to be coming along with expanded economic stimulus from governments around the world in an effort to reduce the impact of the virus on global economic growth.

 So, where does that leave us?

 Some think the U.S. economy may be less affected by the economic fallout of this virus than other parts of the world. However, even if that is the case, that doesn’t mean that the U.S. economy will be firing on all cylinders. Fourth-quarter GDP growth for the U.S. was at an annualized rate of 2.1%, as measured by the U.S. Bureau of Economics, but that number doesn’t matter given today’s situation. Manufacturing activity that showed a modest rebound in January will likely continue to slow. 

 Before the outbreak, Canada’s economy was treading water.  COVID-19 will, no doubt, be a drag on the Canadian economy given our heavy dependence on exports. The global disruption in oil prices will impact Canadian markets negatively as well.

 In Europe, countries have closer economic ties to China. Given the increasing number of cases in countries such as Italy, the economic consequences may be similar to Asia’s. In January, industrial production in Europe continued to slow with an already slower Chinese economy. The strain on the markets from the U.S./China trade war in December and the current supply chain disruptions will only delay the recovery. A rebound in Europe depends on a rebound in China. In the meantime, the German economy will be susceptible to recession, and earnings growth, overall, will continue to be modest, at best.

 Investing requires long-term commitment. And although everyone has a view on which direction the markets will go, no one can predict with absolute certainty the degree of risk in the markets at any point in time or, predict what will trigger markets to correct. All anyone can do is manage risk. The current pull-back in equities has driven us into bear market territory. Historically investors have been wise to “buy into the dips”. At the time I am writing this, we are cautious and not recommending our clients blindly following the “buying the dip” strategy. While this strategy may have worked well for market speculators through the many corrections of the last 11-12 years, the current economic and market conditions require careful consideration before committing new investment money to the markets.

 How can you weather the turmoil and even profit from it?

 Investing during volatile times can challenge your discipline and commitment to any investment strategy. Emotions can run rampant when we see what is happening. Fear can displace sound principles. It’s a good time to revisit some of the principles we apply when investing our clients’ capital. Hopefully, they will help ease your mind and keep you focused on the long term: 

• Diversify across various economies, businesses, countries, and popular investment classes to help spread risk, provide a more consistent investment experience, and reduce potential for underperforming assets to excessively impact your portfolio.
• Make sure you have your asset allocation aligned with your short, medium and long term needs for income and capital
• Stay disciplined and committed to your long-term investment plan — stay off the emotional rollercoaster.
• When things look bleak don’t jump ship. The difference between investment success and disappointment can boil down to a few days of being in or out of the markets.
• Take a long-term perspective. Accept that markets rise and fall but, generally, over time, equity investment markets have always trended higher.
• Turn market volatility into your advantage. By investing a specific amount at regular intervals over time, dollar-cost averaging can help you buy more units of an investment at lower average prices and fewer at higher prices. This can help take the worry out of making a single lump-sum investment at the wrong time. Of course, right now, we are connecting with clients whom we have counselled to be conservative in committing larger amounts of new investment capital over the last couple years to discuss deploying some of the capital into some of our favorite investments.

 In times of unusual volatility, you may sometimes feel an impulse, large or small, to push the panic button and sell or, “take a flyer” on an investment you just know will go up! But emotional decisions are often not the best decisions in the long run. Instead, call us. We can help you determine how best to weather the turbulence — and even take advantage of it in the right circumstances. It’s what we do.

As always, if you have any questions about the markets or your investments, or your overall financial life plan, I'm here to talk.

David J. Luke, CFP, RFP, CLU, CH.F.C., CIM | Financial Advisor

360 Private Wealth Management | Manulife Securities Incorporated 

Unit 1 – 25 Scurfield Boulevard, Winnipeg, MB R3Y 1G4 

Main Office 204.925.5868 | Direct 204.925.2073| Fax 204.925.2263 | Toll Free 844.688.3656  

This publication contained opinions of the writer and may not reflect opinions of Manulife Securities Incorporated. The information contained herein was obtained from sources believed to be reliable, but no representation, or warranty, express or implied, is made by the writer of Manulife Securities Incorporated or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any of the securities. The securities discussed in this publication may not be eligible for sale in some jurisdictions. If you are not a Canadian resident, this report should not have been delivered to you. This publication is not meant to provide legal or account advice. As each situation is different you should consult your own professional Advisors for advice based on your specific circumstances.