Feb 2020 Market Virus
It looks like stock markets caught the coronavirus in the final week of Feb. 2020 and came down with the flu! How long will it last, and what can investors do? The spread of the coronavirus beyond China triggered stock market weakness, with the TSX was down 8.9 per cent for the week while Nasdaq was off 10.5 per cent, S&P 500 down 11.5 per cent and the Dow off 12.3 per cent. A technical issue meant for a time trading on the TSX was suspended on Feb. 27th. The growth in index-based investments such as ETF’s may have also affected the volume of trades, as ETF’s allow investors may sell all securities indiscriminately, unlike in past selloffs, when ETF’s were less widely held.
Let us begin by addressing any worries and providing insights on the markets. In 2019 we saw very strong market returns, especially in the US. In 2020 we may worry about the US-China trade, the US2020 election and political uncertainty in Canada and the stoppage of trade due to the railway blockades and protests. We believe that Canada remains a politically stable country in which to do business, and that these uncertainties are temporary.
Markets recovered from some early losses after US Federal Reserve chairman Jerome Powell offered these supportive comments “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Philip Petursson, chief investment strategist at Manulife Investment Management, stated "The coronavirus was the catalyst to the selloff this week in that it forced market participants to take a look at the fundamentals.” Petursson said the big concern for investors in fundamentals is that corporate earnings will be hit by an economic disruption caused by companies scaling back operations and staffing and by weaker consumer spending. Petursson said the TSX hasn't been hit as badly as U.S. exchanges because it had not share in the same rise in valuations as the US, and so being a relatively cheaper market gave it a margin of safety.
Oil sector stock dropped on concerns that the spreading virus known as COVID-19 will suppress demand from China and elsewhere as businesses curtail activities and consumers reduce travelling and spending. Oil stock prices in Canada were led down by Teck Resources, which withdrew its application for the Frontier oilsands mining project on Feb. 23rd, leading to worries about future corporate investments in other resource projects Canada. The Energy and Materials sectors together make up about 27% of the S&P/TSX.
Portfolio managers are constantly analyzing, and re-allocating investments based on where they see opportunities. At CI investments, they state that it is fair to expect weaker growth in the first and second quarter of 2020. In China, for example, quarantine measures have led to lower activity that will likely trickle through to economic growth. Disruption of global supply chains and travel have led to a decrease in consensus forecasts for economic and earnings growth.
Fidelity for example states that where consensus estimates are overconfident, assets become overcrowded and over-priced, and likely to lead to underperformance. They believe in taking advantage of market overconfidence in positioning for strong risk-adjusted returns in their multi asset class portfolios.
Jurrien Timmer, Director at Fidelity Global Asset Allocation Division, states the spread of the coronavirus beyond China suggests that the earnings recovery could happen later than investors had expected. If stock valuations fall while earnings remain flat for several more quarters, a 5%–10% pullback in stocks is possible. In that scenario, gold, investment-grade bonds, and high-quality dividend-yielding stocks could outperform.
The portfolio managers at Manulife see strong readings on the Global Purchasing Managers Index, an indicator of strong potential growth from the manufacturing sector. However, they also see short-term risks coming from the coronavirus, as less travel and trade will have a negative impact on first quarter earnings for the S&P 500.
What Can You Do?
- Take a long term view: downturns are normally short-term. History shows that the stock market has been able to recover from declines and can still provide investors with positive long-term returns.
- Take advantage of market volatility volatility in markets can also be a good buying opportunity. If you invest regularly over months, years, and decades, short-term downturns will have a lesser impact. If you maintain a disciplined approach, when prices do fall you may actually benefit because when the market drops, your regular contributions allow you to buy a larger number of shares.
- Take a step away from market timing. Our view is that it is very risky to be either "all in" the markets or "all out. Trying to time the best day to invest or to sell and get out is impossible. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds cause those investors to perform worse than they would have had the investors simply bought and held the same fund.
- Take advantage of a professional advisor. As we meet with clients, we review your risk tolerance and your time horizon and investment and income goals and take pro-active stems when markets are strong to ensure your portfolios are structured to suit your needs. For most clients, that means never being "all in" the market. We make adjustments where we believe it is needed and are comfortable that our clients’ portfolios are well positioned for a range of potential market scenarios and that you would be best to maintain your current positioning. Some of the strategies we use to effectively reduce our client’s risk are:
- Use of Diversification – exposure to stocks, bonds, cash or GIC’s; exposure to Canada, US and Global markets, exposure to various industries and investment management approaches
- Use of a Cash Wedge – for expected RIF payments or investments that we expect to be withdrawn in less than two years, we may use an investment savings account
- Use of Cash in portfolios – for investors who prefer less risk, and are willing to give up some of the upside when stocks are strong, we may use a mutual fund or portfolio that holds a portion of the portfolio in cash when stocks are high-priced, which reduces risk and provides valuable buying opportunities during a market correction
- Use of guaranteed products – for those who have no guaranteed pension and require some guarantees, we may recommend a segregated fund or a Guaranteed Withdrawal Benefit, which provides pension-like guaranteed income without market risks. These products may play a role for those who need predictable retirement income or to have a portion of their investments insured.
- Use of gold – gold is a good diversifier because it does not move in correlation with stock markets. While gold bullion has traditionally been illiquid, mutual funds allow investors to hold physical gold bullion (not just mining shares or futures contracts). Because gold is subject to speculation and volatility, it is rated as a medium-high risk holding and suitability depends on the investor.
- Use of Alternative investments - Alternative investments are also a good diversifier because they are not correlated to stock markets. Alternative investments may be held in publicly traded mutual funds and include such things as private capital, private debt, hedge funds, real estate, infrastructure, commodities or other tangible assets.
Be sure to seek the advice of your Investment Advisor before taking action on your portfolios, in particular in times of volatility. Please contact us if you have questions or would like to discuss the markets or your portfolios.