Forgive the long post however I feel the information will help you understand the current market scenario from a non-media (social media) perspective.

With Covid-19 or Coronavirus dominating the headlines of all media channels, including social media, my goal in this post is to provide a pragmatic thought process in a few areas:

1. How to protect ourselves and the potential spread?
2. What is happening to the markets and why?
3. What is the Government and Central Banks response?
4. What does it mean for consumers?
5. What does it mean for our portfolio?
6. What do we consider next?

1.  How to protect ourselves and the potential spread?

To begin, I enclose a link from the World Health Organization website titled “Coronavirus disease (Covid-19) advice for the public”.

With so much misinformation out there, relying on credible sources for our information is the best approach.  At time of writing, the global cases are 115,800 with 4,200 deaths which translates into an average of 3.6%.  To place that into perspective, the death to infected percentage of cases with SARS was 9.6%.  To stop this virus outbreak we must temporarily stop or slow the movement and gathering of people.  Certainly these are unprecedented times, but the data suggests people can self-quarantine and survive the virus.  The high risk areas are folks that are elderly or predisposed due to pre-existing health conditions.  We need to be diligent!

2.  What is happening to the markets and why?

The markets are digesting and pricing in an eventual recession due to decreased spending on travel, tourism, live events, and conferences.  As people are getting fearful they’re not spending – on restaurants, hotels, airlines, taxis, haircuts, coffee shops, conferences, etc.  Airline and cruise line stocks are definitely getting beaten down which we do not own.  What has now complicated the market is the price war on oil between Russia and Saudi Arabia.  Saudi Arabia decided to increase the production of oil yet the global demand for oil is low.  Increased supply coupled with decreased demand = drop in the price of oil.  As a result, on Monday in the stock market we experienced a substantial price decline in oil, along with significant declines in oil stocks.  The good news is we do not participate in this sector!  When markets become uncertain, the most speculative areas begin to decline the quickest – hence the significant drop in Marijuana producers which to confirm we do not own.  And lastly, during times of market adjustments, the stocks that rose the most eventually decline the most, examples of this is the technology sector such as Apple, FaceBook Amazon, Alphabet (Google).  Due to the higher risk inherent in these companies, we are under exposed in our portfolios.

If you are interested in reading TD’s economic perspective as it relates to Covid-19, please feel free to read the link titled “COVID-19 Impacts on the Economic Outlook”.  It is not for client use but given the circumstances I decided to send it to you!

3. What is the Government and Central Banks response?

As volatility has increased, we’ve seen China lean into the situation and stimulate along with other central banks including the U.S. Federal Reserve, Bank of Canada, Bank of Japan, and The Reserve Bank of Australia who surprised investors with a rate cut of 50 basis points.  Just this morning the Bank of England reported a 50 basis point cut as well.  The market initially jumped after the news, however, it has given back those gains. What the market appears to be telling us right now is that rate cuts are perhaps an ineffective tool to address the immediate situation of a spreading virus globally.  That said, the Governments are now contemplating fiscal stimulus and even quantitative easing (QE) which was the strategy used by Government and Central Banks to get the global economy out of the financial crisis of 2008!  At time of writing, Italy announced a Euro 26 billion stimulus package to assist the economy during this very challenging time.  The goal is to stabilize the virus, the economy, the stock market, and the consumer.

As the virus begins to wane, economic activity will slowly resume its normal course with significantly lower interest rates and more stimulus in the system. We’re starting to see early signs of recovery in China; for example, Foxconn will be in full production beginning in March and XPO Logistics (largest parcel company in China) is back to 80% capacity.

4. What does it mean for consumers?

Certainly these are concerning times, however we can be assured there will be benefits to consumers.  Gasoline prices are declining which means more money in our pockets.  With the drop in fuel prices, we hope to see a break in the costs of goods as transportation costs should decline.  If less money is spent travelling, households will have more money in their pocket to save for their future or reduce their household debt.

5. What does it mean for our portfolio?

Our portfolios are balanced which means we have a combination of bonds, and high quality dividend paying stocks.  As a result, the sell-off on Monday did not impact at least 35% of our portfolio due to our bond composition.  The investment mandates we own are mainly low risk, and low-medium risk.  These areas are more insulated to the volatility in owning pure stocks.  I would also like to point out although we may not move any funds, rest assured the portfolio managers are very active.  After participating in many conference calls, webinars, and reading reports, all portfolio managers are managing the following:

Cash:  raising cash in the portfolio in order to buy beaten quality companies that will certainly be higher five years from now
Currencies:  exposures to currencies such as $USD, Yen, Swiss Franc have acted as a portfolio hedges
Avoiding the most exposed:  (0%) in cyclical sectors such as Energy, speculative sectors such as Marijuana
Quality, quality, quality:  companies with High Free Cash Flow Yields, companies that can manage through downturns versus overleveraged companies

It is understandable when you tune into the news it seems very dire.  As a result I wanted to include the chart titled ‘Immune – world epidemics and global stock market performance’ which outlines how the markets performed after previous epidemic crises:

In addition, I’m also linking to an article titled “The Rise and Fall of Emotional Investing”.  The psychology of investing is to do the exact opposite of rational thinking.  We all want to buy when things go up, and we all want to sell when things go down.  In truth, the exact opposite should happen, namely what Warren Buffett does (the world’s most successful investor) – buy when people are selling, and sell when people are buying!

Clients should not fear a bear market. Consider this, there have been 11 recessions in the U.S. since World War II and interestingly, investing at the start of a recession does not necessarily mean you will lose money. For long-term investors, it is often just as good to invest at the start of a recession as you can see in the attached table titled ‘S&P 500 index recession chart’. (Please note this may not view properly on certain mobile devices).

The average one-year return after the start of a recession is -0.2%, but over longer periods the results are encouraging with the average 3-year annualized return of 7.4%, 5-year annualized return of 6.3% and the average 10-year annualized return of 7.0%. Notably over a 10-year period, you would have only lost money once out of the 11 recessions for a success rate of 91%.

6. What do we consider next?

The stock markets will hit a bottom before the economy.  The only way to truly take advantage of any crisis is to be opportunistic during the storm (especially temporary storms).  Will it be a V-Shape or U-Shape recovery?  No one really knows plus it doesn’t matter if your time horizon is 24 months or more. It’s hard to imagine that this virus will still dominate media headlines in 2021.  Even harder to imagine in 2022.  This crisis will come and go, but high-quality growing businesses will survive and rebound from this situation.  Potentially with even lower interest rates than before the crisis. This is bullish for long-term investors.

In terms of opportunities, should we consider buying?  There are a lot of predictable free cash flow + growth companies, in sectors like infrastructure/utilities; telecommunications, REITs, and consumer staples, with predictable earnings that are not going to get buffeted around by this.  How about companies that rely on face to face meetings?  When it comes to videoconferencing or cloud computing, companies are coming to the realization the need to do less on premise and more distributed work. There will be more emphasis on connectivity and cloud base solutions.

In my view there are going to be opportunities to capitalize on this downturn, whether it is investing lump-sum contributions such as a RRSP or TFSA, or systematically buying into the market with a monthly deposit strategy.  At some point the growth rate of COVID-19 will slow down. The minute this happens will be great news, and we would look at that point as the buying opportunity!

I hope you found this information to be helpful.  Please do not hesitate to contact me if you have any questions, or if you would like to learn more on capitalizing on this downturn.