I am certainly glad to see the beginning of Spring! How lucky we have been to enjoy such great weather during this difficult time. Our office is now in our third week of working from home – it has been a neat experience to discover how technology can still allow for excellent collaboration. I hope that you and your families are also safe, secure and staying connected.
We had few boring days in March – seeing the market make/lose a typical years’ gains/losses in just a day!
At the lowest point, last Monday, equity markets in Canada and the US were down nearly -40%. Thankfully, the market rebounded from the lows, moving up +20% in just 3 days. In fact, last Tuesday we saw the biggest daily increase in the stock market since 1937! Still, it may be too early to claim victory over the economic impact of the Coronavirus just yet.
We are likely going to have some sort of a recession (in fact we are probably already in one). Looking at the last six recessions (over the past 50 years) – stock market pullbacks from peak to bottom have averaged appx. -34%. This most recent pullback was as low as -38.4%, so the market may have already more than fully priced in a ‘typical’ recession.
I note that Covid-19 has been anything but ‘typical,’ but the declines we have recently experienced already rank among history’s biggest. Global stock markets have lost and estimated $8 trillion dollars in the past 5 weeks. Our ‘Market Sentiment’ chart (below) shows that behavior hit ‘Extreme Pessimism’ levels last week as investors sold out of everything. There is an upside recovery to all of this (just like there has been in all past recessions and crises) and it is always darkest before the dawn.
So, how long will the recession last and when could we see a jump back up in prices?
The S&P 500 Index (largest 500 companies in the US), officially entered a ‘bear’ market – defined as a 20%-or-more drop from a previous all-time high - on March 11th. The drop occurred in just 16 trading days, suggesting that the speed of this fall is as unprecedented as the cause (and the magnitude of subsequent monetary and fiscal policy responses). Consider that an average bear market has typically taken a year or more to materialize (chart below).
Noting today’s similarity to the 1987 ‘Black Monday’ crash (above in brown) – it could take two years for the stock market to fully recover from current levels. Though this doesn’t mean that there will not be opportunities in the near term. To confront the recession and get the economy going again, central banks have cut interest rates to zero (monetary policy). Politicians have also put measures in place to postpone mortgage and loan payments and have made trillions of dollars available immediately to those who need it (Fiscal Policy). I think it is reasonable to think that all of these ‘unprecedented’ stimulative measures could soften the economic impact and lead to an equally ‘unprecedented’ short recession and expansion. If last Monday was the bottom (and that is a big if), returns of +39% and +56% are a reasonable expectation for equities over the next 12 and 24 months when considering other bear market recoveries (chart below).
It all depends on our global collective ability to fight this virus!
I am by no means an expert in pandemics or virology – but I am enthused everyday to read about the amazing discoveries and advancements that are being undertaken around the world to combat Covid-19. As opposed to the development of a vaccine, which could take a year or more – current clinical trials are attempting to utilize already commercially available and approved drugs to inhibit the virus from spreading within the body, massively reducing fatalities and the need for assistive breathing equipment. Details on all of the current trials can be found here, but I think two in particular are most interesting:
The WHO’s ‘Solidarity Trial’ now includes 45 participating countries (including Canada) testing four different drug combinations on potentially thousands of Covid-19 patients. These trials are an attempt to prove if what works in the lab, can actually reduce the potency of the virus in an infected person. Information on these trials here.
In addition, the US is also testing the potential benefits of administering Chloroquine and Hydroxychloroquine (Malaria treatments) to combat the virus.
There has also been a lot of talk this week about antigen and antibody tests for those who are asymptomatic (not showing any signs of sickness). These test could identify (in minutes) if a person has already been exposed to the virus and built up a resistance. A better understanding of who shouldn’t get sick, could certainly go a long way to jump start the economy.
With any hope, we could start to see some definitive results to this preliminary testing by the end of April.
We will continue to keep you up to date with regards to our views of the economy and the impact on your portfolio as we navigate through this ‘unprecedented’ time. Please feel free to call or email any of us with any questions you may have.
Lastly, I want to pass along a BIG ‘Thank you!’ to all the healthcare workers, first responders and essential service workers who are bravely on the front lines of this battle against Covid-19. Stay safe and I wish you all the best as we get through this thing!