As we all manage the effects of the COVID-19 outbreak and its impact on our daily lives, I’d like to take the opportunity to provide some perspective on activities in the markets and what this might mean for your investments.
What is happening in the markets?
The spread of COVID-19 and the recent explosion in cases around the world has prompted a sharp market correction in global stock markets. Assets seen as safe havens, such as gold, increased in value. The outbreak first had a significant effect on China, the world’s second-largest economy with a key role in the global supply chain and a consumer of foreign goods. As the virus continues to spread around the world, markets are reacting to the outbreak’s expanding impact on the global economy.
Have previous epidemics affected the market?
Previous epidemics have affected the markets as shown here, although, the historic effects have not been too dramatic. This pandemic is unique in its global scale; however, based on information from medical experts we know it will eventually end, they may develop a vaccine, and life will get back to normal, as will the global economy and the markets. The big question is: when? This is what causes the uncertainty, and the markets don’t respond well to uncertainty.
What should we expect to happen next?
In the short to medium term, we can expect weaker economic growth and a decrease in corporate earnings. It will take time for the world to resume production and for the disruption to global supply chains to be repaired. The effect on the global economy has worsened as the number of cases around the world continues to grow. However, other factors are supporting the markets. The Bank of Canada has stepped in with a 1.25 percentage point cut to interest rates, while the U.S. Federal Reserve dropped rates, as well. In addition, governments and central banks around the world are responding with aid packages for stricken businesses and individuals, helping to stabilize the economy and the markets.
Predicting the ups and downs of the market is a near-impossible task. Don’t try to predict; just wait. Maintaining focus on your investment objectives and long-term goals will help get you to your finish line.
What should I do?
When markets decline, investors may understandably be concerned. Corrections are an expected part of the investment cycle historically, these ‘bear’ markets have limited durations. Records show that investors who reacted to these market situations by selling their investments, missed out on the substantial market rallies (or ‘bull’ markets) that followed.
I’ve included the chart below to demonstrate the risk of not being invested and missing out on the stock market’s best days, which often come after large declines like we have recently seen.
Taking pause and having patience with your investments following steep market declines increases the probability of achieving enhanced returns. My advice is to stick with your existing long-term investment plan, which takes into account stock market volatility. Your plan was carefully constructed to reflect your personal objectives and investment time horizon.
SOURCES: The information in this summary is derived from various sources, including CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, CI Multi-Asset Management, Globe and Mail, National Post, Bloomberg Finance L.P., Yahoo Canada Finance, and Trading Economics.