COVID-19 & Your Portfolio

Jonathan Adomait |

Wow... what a crazy month it's been. We've seen people panic-buying toilet paper, record volatility in the markets, and some of the fastest 20% drops in the history of the stock market.

Given the circumstances - I think it may be best to discuss the following topics in this month's newsletter:

- What caused one of the fastest stock market corrections 
- What has happened during other extreme stock market events like the one we're seeing
- What may be expected for the remainder of the year
- What to do in this current market environment

What caused one of the fastest stock market corrections?

A driving factor in the recent stock market correction has been the prediction of slower economic growth amid the global outbreak of COVID-19. Investors have been concerned with economic growth being negatively impacted, which will hurt stock prices and potentially bring us into a recession.

This information would have started the correction, but with the volume of trades and speed at which markets have fallen you have to look beyond rational repricing of markets. Here's how one of our research firms described the trading this past week:

"Pure, unbridled panic. There are really no other words for what markets witnessed on Thursday. The price action, market disruptions, and cross-asset volatility have been matched by few times in history... This is some kind of hybrid monster mashup of 1987 and 9/11 and October 2008."

Stock market moves are now faster than they've ever been. This may be caused by individual investors having access to information quicker then ever before. They can buy and sell businesses for no trading costs and on top of this trading can be done from their mobile phone out on the job site. There is no longer any "friction" in getting involved with the stock market.

So, why is this so relevant? As investors read the news and become bridled with fear over COVID-19, they will make irrational decisions. If they own businesses and aren't sure of the intrinsic value in them, the moment fear washes over them they may decide to sell. One of the most popular investment vehicles for retail investors today are ETF's, and the SPDR S&P 500 ETF just saw one of the largest weekly outflows ever, with over $20B flowing out in the first week of March (These are supposed to be long term investors).

Source: WSJ

What has happened during other extreme market events like the one we're seeing?

I want to preface the data and charts I'm about to present as they need to be taken with a grain of salt... there has been such breadth and depth of selling pressure that it's exceeded all historical norms. That being said, here's the first chart:

When you look at the average of all other bear markets, we typically do not start out with a large swift decline in the market. They tend to be more drawn out and take on average 255 trading sessions. The next chart deals with investors having very low confidence and high pessimism. (See below)

Historically, when the S&P 500 shows low confidence and high pessimism, 1 year later the markets have been up 71% of the time with an average maximum loss of -2.7%, and average maximum gain of 25.1%.

What may be expected for the remainder of the year?

Anyone that tells you they know what's going to happen from here on is lying. No one knows. 

Insights we've received from chief investment strategists and research is indicating this may be a swift recovery.

How, you wonder? 

Well, consider the drastic measure that governments around the world are taking right now to control the COVID-19 crisis. China has quarantined cities with populations north of 50 million people.

In Italy, the government is giving citizens a reprieve from their mortgage for the month.

In the US, they've cancelled the NBA, MLB, NHL and many other events. In Canada we are seeing similar closures, with schools being closed an additional two weeks beyond March break.

If these measures are effective, then yes - we will see an economic pause for a number of months as people are in isolation. However, all the products (cars, homes, etc.) that people were planning to buy before this virus became an increasing issue, will resume their purchases once this has blown over. This demand could create one quick recovery later this year. Philip Petursson, Chief Financial Strategist for Manulife Financial has coined the term "The Great Pause".

In China, after just one month they've had a significant reduction in the number of new daily cases being reported. (See below.)

Source: Worldometer, China

Since China has been the epicenter of the virus, it may be beneficial to analyze how their market is performing. (See below)

When it appeared that China was having an outbreak, their stock market corrected significantly. However, since it appeared the virus was under control, the market rebounded sharply. Although China's draw down wasn't as significant as the rest of the world, their powerful recovery could be a road map for how the rest of the world markets react.

What to do in the current market environment?

1. Leave emotions aside - This is critical! This will only cause you to make irrational decisions that could lead to turning unrealized losses into real ones. If seeing a negative quarterly statement will cause you to make emotional decisions, don't look at it. Save it for a few quarters later.

2. Leave it to the pros.

We pay portfolio managers to take advantage of situations like these when investors are scared, and it's times like these that we need to step back and let them do their job. Think of it this way - would you stop your doctor in the middle of open heart surgery because you no longer felt comfortable with the procedure and walk out of the room?

Many professional investment managers are salivating at the opportunities the market has presented them over the last few weeks.

Here's an excerpt from Warren Buffet shortly after the market crash in 2008:

"When it's raining gold, reach for a bucket, not a thimble." We're going to need a bigger bucket.

3. Keep things in perspective

There is so much fear over COVID-19  that I wanted to provide some alternative stats on viruses:

Influenza: (US, 2017-2018)
- 45 million cases 
- 810,000 hospitalizations 
- 61,000 people died

Swine Flu: (US, 2009-2010)
- 61 million cases 
- 274,000 hospitalizations 
- 12,469 deaths 

COVID-19 is either in a very early stage or is very over-hyped by the media. Or, perhaps it's deserving all the hype it's getting but the government's drastic measures will help contain it. I don't know, you don't know, so let's stay calm and let the professional money managers capitalize on these opportunities. 

Feel free to share any additional insights you have, or let us know if you have concerns and what we can do to help.

We're here for you.


Jonathan Adomait
Financial Advisor, BASc

P.S - Have questions or want us to discuss a particular topic? Let us know by sharing your feedback!