Market Insights: Market Commentary

What were the significant developments this week?

• Canadian and U.S. markets remained volatile, fluctuating between strong moves up and heavy moves down throughout the week and demonstrating that investors are still not confident in how this crisis will play out.
• The federal government’s commitment to fiscal support for Canadians reached $176 billion, after it announced a plan to subsidize 75% of wages for workers of eligible businesses.
• Oil prices sank even lower to begin the week before rebounding. U.S. President Donald Trump held a “prolonged” call with Russian President Vladimir Putin, where the two agreed to further discussions between energy officials in the two countries.  Many beaten down Canadian oil and gas stocks staged big rallies this week as a result.  There is even some speculation that legendary value investor Warren Buffett may have been actively buying up these shares this week.
• The number of confirmed COVID-19 cases worldwide surpassed one million and continued to grow exponentially, with many countries keeping social distancing and lockdown measures in force.  Fortunately Canada remains one of the countries that has avoided the worst of the crisis and for that we are thankful.

How does this affect my investments? 

• As recent market swings have demonstrated, it’s impossible to time short-term movements to avoid losses and capture gains. This is why we built your portfolio as a long-term plan. Attempts to capitalize on events such as these with short-term planning can lead to you missing out on the consistent long-term growth that forms the basis of successful financial plans.  
• I know that it can be difficult to avoid the daily chatter surrounding the market’s hourly reaction to events, but remember that while the items above are major news stories today, when the world emerges from this event, this too will become yet another bump in the long-term trend of the stock market.

Reasons to stay positive
Although the numbers related to the virus will continue higher for some time and the economy will likely see even slower numbers to come, that doesn’t necessarily mean we will see the stock market go significantly lower. The stock market is a discount mechanism that tends to lead by six to nine months. No one knows for sure how much the market has priced in the upcoming slowdown in the economy, but we remain positive for four reasons:

1. Price Action: One important factor we use to judge the health of the overall market is the price action of leading stocks. While many growth companies still need time to build proper bases, we are encouraged by the strength we are seeing in the sectors that led prior to this correction. We stress that one much be patient and defensive as the market builds a base, but we are encouraged by this and small step in the right direction.
2. Extreme negative sentiment: We pay close attention to sentiment data as it often tends to fool the masses, and right now, the majority of people are expecting the market to go much lower and many fund managers remain under-invested. The market has already exceeded the average bear market decline. While we are not suggesting we don’t get another new low, we also need to be open-minded that most of the slowdown in business may already be priced in.
3. Global central banks: In the last month, the US Federal Reserve cut interest rates to zero and revealed a historic “quantitative easing infinity” program (in addition the US government announced a $2 Trillion USD fiscal stimulus package, and we may see more), while the European Central bank and the Bank of Japan announced their own US$820B and US$700B asset purchase plan programs of their own. Also, the People’s Bank of China cut rates by the largest amount since 2015 and continues to provide historic liquidity. In a global concerted effort to mitigate the impact of the outbreak, global central banks are now providing us with equity friendly environment on steroids that move very strongly to the upside if we begin to see any improvements. Remember, markets don’t move on whether data/news is good or bad, it moves on whether it is getting better or worse.  
4. History: Any major decline in a very short period of time can be considered crash. Therefore, it is worth studying two previous crashes of The Crash of 1987 and the Flash Crash of 2010 to anticipate future moves. The main point we want to make about both of those periods is that after the initial low, markets didn’t have to go significantly lower. In fact, the initial low in October 1987 was never touched again, and the first low in 2010 was only later exceeded by a few percentage points. In both cases, however, it did a few months to build a bottom. This is why we stress patience in order to give the market time to heal its current technical damage.

 

Sources: CI Investments Inc., Bloomberg Finance L.P., The New York Times Company, CNBC LLC and Yahoo! Canada Finance.