Matt Carvalho, Chief Investment Officer, Cardinal Point Wealth Management
If you’re anything like me, there have probably been a few instances over the last few months when you woke up thinking, “This must be a dream, right?” School closures, severe travel restrictions, working from home full time and wearing a mask anytime in public were dystopian concepts as recently as the start of the year.
Financial markets have responded likewise, recording the fastest plunge from previous market highs to a bear market with losses on the S&P 500 passing 20% in a record 16 trading sessions. A typical peak to bear market normally takes somewhere closer to six to 12 months to develop. And those losses cascaded quickly, trading down to -34% from the previous high on February 19th to bottom for the quarter on March 23rd. Canadian securities represented by the S&P/TSX Composite followed a similar path, plummeting 37% from February levels.
Along the way, we saw a variety of reactions in different areas of the market. Smaller companies meaningfully underperformed as investors worried about their ability to weather a financial storm that may last months. Bonds with any type of credit risk also dramatically underperformed Government Treasury Bonds, which proved to be the only pristine area of the market. And finally, energy related stocks took a one two punch, not only due to falling demand as many individuals around the world curtailed their travel plans for work or vacation, but also as OPEC discussions crumbled and production quotas were sidelined. Increasing supply plus reduced demand led to a crash in the price of oil.
States and Provinces across North America have differed in their timing of travel restrictions and social distancing requirements, but their actions have started to create an unemployment impact order of magnitudes different than we have ever seen. Many individuals previously employed in areas like hotels, restaurants, or entertainment are now out of work as businesses are forced to shutter under this economic pandemic. In a best-case scenario, those individuals can be immediately hired back as economic activity begins to resume. However, there is no recent case study or historical example to draw from to determine just how probable or likely it is that an economy can flip the switch back to on.
The actions taken in terms of monetary and fiscal policy have occurred more aggressively than during the Global Financial Crisis in 2008 and certainly in a far more positive direction than in the Great Depression, when most government policies (such as trying to balance the budget) acted to worsen the economic situation.
Seemingly the stock market has started to look past the current situation and well into the future. As many countries were able to just initially start bending the curve of COVID-19, and governments across the world really started to ramp up their stimulus plans, the market overall realized that we may just yet get through this ordeal. Between March 24th and May 9th, stocks markets rallied dramatically, with the S&P/TSX Composite rocketing 34% and the S&P 500 rising 31%, both making up around 2/3 of the previous decline.
This volatility both up and down has been shocking. Through April this year on the S&P 500 we’ve already seen 31 days of greater than a plus or minus 2% return day. That 31 days over four months is about the same number we saw over the previous four full years, including zero such days in all of 2017. This period of volatility is unlikely to subside in the near future. News of massive unemployment claims, drug trials that succeed or fail, and the latest projections for how soon economies will be able to resume some typical activities will all have meaningful impacts on trying to value securities.
What Can You Do?
So, what can investors do in the meantime? One benefit of markets having recovered much of their recent losses is that it’s a great opportunity to reevaluate the overall asset allocation in your portfolio to ensure that it’s still in alignment with your timeline, goals, and aspirations. Perhaps after many years of positive market returns you’re ahead of schedule on your long-term goals and can afford to take a little bit of risk off the table. Or maybe you’ve had cash on the sidelines from a previous job or house sale that you’re looking to invest for the long-term. Whatever the case, we know markets are going to be volatile but can also provide opportunities for long-term growth.
With our health at top of mind and a bit more time around the house, it is also a good opportunity to make sure your financial plans and estate planning are in order. Investors with business or assets on both sides of the U.S./Canada border face an extra level of complexity in normal times, and recently both Governments have passed several changes to previous systems which may impact you.
Below are some of the larger financial planning changes brought about by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the U.S. and Canada’s COVID019 Economic Response Plan:
· Suspension of 2020 Required Minimum Distributions from U.S. retirement accounts and a 25% reduction in mandatory distributions from Canadian Registered Retirement Income Funds (RRIF)
· Delay of tax filing requirements, with the initial date set by the IRS for July 15th and by the CRA of June 1st. In most cases, no interest or penalties will be imposed for tax due from 2019 filings. Any additional tax that might be due with your U.S. tax return will need to be paid at the same time as your U.S. return is due – July 15, 2020. In Canada, although the return will need to be filed by June 1, 2020, any additional tax due can be deferred and will be required to be paid by September 1, 2020.
· Additional benefits for those on unemployment, needing mortgage relief, or small business assistance
For all of the above, please consult with a financial advisor to help determine any impact to your own financial situation.
What’s Next?
In the midst of any downturn, it’s hard sometimes to look beyond the valley we are currently in and see the eventual things that will lead us out. While the exact cause of each market decline is often meaningfully different, the feelings of fear, anxiety, and capitulation during big downturns are common. We can take some solace that those same feelings occurred in each of the previous downturns as shown on the chart below. As painful as each case was at the time, the market did recover and ended up hitting new highs at some point.
The folly of trying to time the top or bottom of any market cycle has been well documented. This pandemic is unlikely to change those odds. The headline of a Bloomberg article summed up the sentiment of the early days of the second quarter thus far: Rallying Market Makes a Mockery of Every Effort to Forecast It. One expert is quoted as saying, “I don’t think there is any edge anybody can have in predicting… I have no model, I have no insight in what could turn the market from here. Forecasts are just all over the place—it’s just throwing a dart”
Change is going to occur, but it’s impossible at the moment to clearly see what it will look like. The new normal of social distancing may be around for a while, and that’s likely to have a ripple effect across the economy. What if better hand washing and more working from home lead to less flu and traffic fatalities in future years? Will companies discover they need less office space, and workers discover they want bigger houses in case events occur like this again? What if some portion of students find they are able to learn through online courses just as well as in person classes? Do they pursue online degrees, which may leave them with less debt upon graduation? Will working remotely make it harder to develop relationships and networks that can help careers? What if more people who were quickly laid off decide they want more control over their financial situation and start their own companies as a result? Will we see a rise in small businesses to replace those that didn’t make it? When will I feel safe to bring my kids back to Disneyland?
It’s difficult to predict how the economy will be shaped by this pandemic, but one thing we remain confident in is that companies will continue to innovate and look to supply the goods and services that people demand. And they will look for capital to help do so.
In the meantime, try to stay healthy.
Matthew Carvalho, CFA, CFP®
Chief Investment Officer
Cardinal Point Wealth Management, a Cross Border Financial Advisory Firm
Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Bank of Canada, Capital Economics, Bloomberg Economic Calendar, U.S. Department of the Treasury, Morningstar Direct 2020, “Rallying Market Makes a Mockery of Every Effort to Forecast It” Bloomberg April 7, 2020, Dimensional Fund Advisors provided Bull & Bear Market chart.
Indexes used: Canadian Stocks- S&P/TSX Composite TR, U.S. Stocks S&P 500 TR. Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.