Information in this document current to the webcast date of Thursday, March 5, 2020.
Last week, we held a webcast with advisors where we provided an update on our portfolio positioning and economic developments in relation to the coronavirus. At the start of the week of March 9, the S&P 500 began the day down 7% with additional uncertainty due to a disagreement between Saudi Arabia and Russia over oil supply management. At the end of day on March 9, the S&P 500 was down 7.1% – highlighting that markets are still nervous.
- Quick market review: Heading into the year we had positive developments with respect to global trade and Q4, 2019 earnings were very strong – all boding well for further market appreciation.
- Since January 23, markets have been more volatile with reports of COVID-19 cases outside of China, with S. Korea, Italy and Iran being on the frontlines. More recently, these swings have been quite volatile.
- During the volatility, higher quality bonds have done exceptionally well, reinforcing the need to diversify as part of any investment strategy.
- Economic activity will be negatively impacted as prudent public health practices to reduce the virus spread are being implemented, such as limiting travel and quarantining people.
- We have seen a disruption in supply chains, and this has been particularly hard on China’s economy. And, because China is the world’s second-largest economy, this will have knock-on effects to other economies.
- Markets sold off on the U.S. Federal Reserve reducing its benchmark rate by 0.50% (March 3), which was intended to provide some economic relief but instead spooked markets. Canada also reduced its benchmark lending rate (March 4) by the same amount.
- Developed economies in Europe have less scope to reduce rates, which makes them more vulnerable.
- However, monetary policy cannot fix supply shocks – governments have not stepped in with fiscal actions to a great degree – yet.
- Key questions: Are the earnings deferred, or are they permanently impaired? Some sectors are facing permanent impairment like restaurants (if you do not go today, you will not go tomorrow and order twice as much). However, other sectors such as purchases of durables, may simply be delayed.
- Economic impact in China as measured by Purchasing Managers Indexes (manufacturing and service) indicate a sharp drop in activity. However, the unknown is whether it is one month, three months, or the remainder of 2020.
- Previous pandemics have shown a downturn in stocks following the introduction of the virus; and they have featured a strong recovery in the three months following the peak in cases. It is important to realize that we are not at the peak yet for the coronavirus.
Potential tactical positioning activities on the Sun Life Granite team:
Selling: Recently trimming some high-quality bond holdings (yields too low), and trimming some European equity exposure.
Buying: U.S. equities have demonstrated better upside coming out of the dips, so they may present opportunities; cash position increased for future opportunities;
Interesting: Risk is getting cheap (looking to add risk at various price points as markets sell off); Extreme volatility could subside a little (looking to use derivatives to make small gains in these environments); Targeted upside opportunities (purchasing options to potentially gain from bounce backs).
Key points about markets and volatility
When equity markets have a big, single-day decline, there is often a high degree of correlation between markets in different countries. So, historical correlations are not much use.
Asset class diversification (including government bonds) generally provides more relief from stock market downturns than diversification between different equity markets. Most managed solutions, such as Sun Life Granite Managed Solutions, provide asset class diversification and rebalancing.
It is difficult to time entries into equities or mutual funds that invest in equities. And, by sitting in cash, there is potential lost opportunity during periods of recovery.
Advice is critical in challenging markets. Research shows that investors who work with advisors, on average, have better financial outcomes than those who do not.
While current market moves are unpredictable, previous market downturns have shown that declines can unfold over months. Even after bad days, markets can (and often do) get worse before they get better. Investors should work with their advisor and consider their time horizon before adding to equity positions for their long-term savings.
This commentary contains information in summary form for your convenience, published by Sun Life Global Investments (Canada) Inc. Although this commentary has been prepared from sources believed to be reliable, Sun Life Global Investments (Canada) Inc. cannot guarantee its accuracy or completeness and is intended to provide you with general information and should not be construed as providing specific individual financial, investment, tax, or legal advice. The views expressed are those of the author and not necessarily the opinions of Sun Life Global Investments (Canada) Inc. Please note, any future or forward looking statements contained in this commentary are speculative in nature and cannot be relied upon. There is no guarantee that these events will occur or in the manner speculated. Please speak with your professional advisors before acting on any information contained in this commentary.
©Sun Life Global Investments (Canada) Inc., 2020. Sun Life Global Investments (Canada) Inc. is a member of the Sun Life Financial group of companies.