Fears of COVID-19 becoming a global pandemic continue to pick up steam and trigger panic among investors along with a sharp pullback in equity markets.
It took less than a week for markets to enter correction territory (defined as a 10 per cent drop). While this correction came faster than anyone expected, the size of the downturn is actually still quite within normal levels and in line with ones we’ve experienced many times over the last decade.
Markets have risen eight out of the last 11 years despite annual corrections so we believe that we will be able to weather this storm with active management, especially when there are no signs of an upcoming recession.
There has been swift action taken by governments around the world which I feel will help to reduce the coronavirus from being a real long-term problem. The Fed has moved pro-actively to lower rates by half a percent to support the U.S. economy in response to the growing threat of the virus and its uncertain effects. Usually investors respond positively to lower rates as it lowers borrowing costs for consumers and businesses. However, markets pulled back on the Fed news, as this may have signaled that there might be worry about the virus and its potential effects on the economy. The Bank of Canada followed suit and also lowered interest rates by the same 0.50 per cent. This should benefit Canadians who have a floating-rate mortgage or any other debt that has a variable interest payment.
It’s likely that this extreme fear is overblown, as the fundamentals of the U.S. economy are still in a good position with a strong housing market, consumer, and employment all doing very well. While it is still too early to assess the economic impact of the virus, we believe that the U.S. should be able to remain solid through any short-term effects. It is fair to expect weaker growth in the first and second quarter of 2020 and investors should be prepared for that. In China, for example, quarantine measures have led to lower activity that will likely trickle through to lower economic growth. Disruption of global supply chains and travel have led to a decrease in forecasted earnings growth. Markets could remain choppy until we get more clarity on the rate of spread outside of China and if we see the virus contained.
At this point in time, while the risks have increased, we are not of the belief that the current environment will evolve into a recession. The coronavirus is mainly expected to impact short-term growth, implying little expected change in the long-term fair value of risk assets.
It is important when stock markets start getting volatile that you have a defensive strategy in place for your portfolio. Some sectors or geographic areas will be impacted more than others and you’ll want to ensure you limit your exposure. This can be done through raising cash, getting defensive early, shifting into sectors that aren’t affected as much and avoiding sectors that are affected such as hospitality, airlines, energy, and materials. This can help you lower the volatility in your portfolio and have better downside protection. Eventually this shall pass and markets will settle. Once they do, it’s important to invest in strong, well-known companies that have pulled back with market fears but in reality aren’t significantly impacted by the coronavirus. Corrections are a natural part of the investment cycle and staying all in cash out of fear is the wrong move. Over the long term, investors who actively managed their investments and used volatility as an opportunity to buy have most often reaped the benefits.
Lori Pinkowski is a senior portfolio manager and senior vice president at Raymond James Ltd. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or firstname.lastname@example.org. You can also listen to her every Wednesday morning on CKNW at 8:40 a.m.