On March 16, 2020, U.S. markets were nearly 25% from their February highs which were achieved in the third week of February, less than one month ago. A 20% decline is considered a bear market, so we are now officially in a bear market.
Most global markets have experienced a similar decline. Although the original decline was triggered by the spread of COVID-19 outside China, this was really the catalyst the market was waiting for – that is, a reason to correct. This has now been exacerbated by a collapse in energy prices as a result of the inability of OPEC nations to agree on measures to keep the price of oil up – particularly in Saudi Arabia and Russia. Added to this, the tremendous fear and uncertainty surrounding the COVID-19 virus with respect to how much it’s going to spread and what the effect is going to be on the global economy has created unprecedented volatility, similar to that experienced in the 2008 financial crisis.
The current decline in markets has only taken us back to the levels we saw at the end of 2018, when financial markets corrected due to trade wars and recession fears. Keep in mind that when we have seen these patterns before, the markets recover. We’re not trying to state that this bear market will be short lived with a quick bounce back. However, we have experienced virtually uninterrupted market growth for almost 11 years since March 2009. Even with the current 25% decline, U.S. Equities remain up over 14% per annum over the 11 years since the March 9, 2009 market low at the end of the financial crisis. Markets do go in cycles and corrections/bear markets do occur.
While it’s impossible to predict what impact the COVID-19 virus could have on global economies, we can turn to previous health pandemics, including SARS, which did not have a pronounced long-term effect on economies and stock markets other than some initial panic and volatility while those pandemics stood their course. There have been nine major epidemics since 1983, all of which caused an initial correction followed by recoveries over a period of time. Governments around the world are stepping in to provide economic stimulus to aid in a recovery. Interest rate reductions, along with monetary and fiscal stimulus, are being introduced rapidly in many countries to support economies.
The situation in China seems to have abated somewhat. Their response to the virus has been extremely aggressive (Italy is now following suit) and the result is a dramatic decline in the number of reported COVID-19 infections in China over the past week. Much of their economy was shut down for a month and their first quarter growth will be negative. However, manufacturing activity is resuming in China and things are gradually improving. It seems they are over the hump in terms of the rapid growth of the COVID-19 situation. With North American and European governments following suit, the hope is that fears will be quelled and recovery will occur sooner. It’s the unknown that keeps the continued panic and volatility in financial markets.
Remember, as this is all going on consumers continue to buy goods and services, companies continue to run and the world goes on as it did in 2009. A bear market provides buying opportunities as past bear markets have demonstrated.
The following is a quote from Gil Lamothe, iAIC’s lead Canadian equity manager:
“It is important to bear in mind that in times like this, the price of a stock (or any other asset under pressure) is not reflecting the underlying value, but merely what someone is willing to sell it for. When there is a rush to the door, that price continues to drop, regardless of any underlying company fundamentals.
The dividends that we invest in by buying companies that are well established continue to be paid, and it is this income flow that underpins the true value of your portfolio.
This market downturn is leading to a rare buying opportunity, where we are beginning to see dividend yields in the 5%, 6% and even 7% for our Canadian banks, which have not cut or reduced their dividends at any time over the 21 years I’ve been managing Canadian equities. We are waiting patiently for global markets to begin to have a sense as to the economic impacts of this virus. This may take some time, and we are certain to see this volatility continue. It is very dangerous to be taking action, either buying or selling, when irrational behavior is governing the markets.”
We reiterate that our key message in all of this is just as we said in 2008/09 during the financial crisis, 2011 during the European Sovereign Debt crisis, 2015 during the energy collapse and at the end of 2018 during heightened fears of recession; stick with your long-term investment plan. Do NOT trade on speculation or panic.
Steven Belchetz, Senior Vice President
T.E. Wealth (iAIC)
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