May 14, 2020

Quarterly Report - Spring 2020

As mentioned in our last Quarterly Bulletin, we had anticipated some stock market volatility in 2020 before this crisis began, but none of our scenarios predicted a market correction of this magnitude caused by a coronavirus outbreak. Since the start of the pandemic, the spread of COVID-19 has had far-reaching consequences for the global economy and the financial markets. Nations have adopted extraordinary public health measures while governments have had to step in to support the global financial markets. Like many other central banks, the Bank of Canada cut its key interest rate (to 0.25%) and launched new programs intended to keep the financial system functioning. In the United States, the Fed slashed its interest rate to near-zero before announcing an unlimited quantitative easing program.

Governments have announced unprecedented measures to support people and businesses. Canada’s federal government has set aside more than 240 billion dollars to fight the pandemic. In the United States, the rescue plan amounts to more than 2.5 trillion dollars (approximately 10% of GDP), an unprecedented sum that could grow higher still. On a positive note, central banks are better capitalized today than they were during the 2008 financial crisis. In addition, the low level of unemployment in the pre-crisis period (3.5% in the United States) bodes well for the subsequent recovery.

How the markets reacted

The North American and international markets were spooked by governments’ lockdown orders and reports of falling corporate earnings, sending stocks into a sharp decline. The economic numbers will remain discouraging until governments announce the reopening of key economic sectors. The lockdowns have led to massive job losses in Canada and the United States, where over 27 million people have filed for unemployment. Retail sales fell by a record-breaking 8.7% in March. Manufacturing output plummeted by 6.3%. Thankfully, the global markets rebounded in late March and absorbed some of the earlier losses. Certain economic sectors, especially those linked to essential services, healthcare and online sales, have recovered well, while others like energy and financial services remain strongly affected.

What does the future hold for us?

All kinds of predictions have been made since this crisis began. Strategists initially debated whether we’d see a V-shaped or U-shaped recovery. Now they’re talking about a “jagged-shaped” or W-shaped recovery. Time will tell who was right. One thing is for sure: businesses will see a drop in profits. But how low will they go? According to our economists, GDP will decrease by 6% in Q1 and by 26% in Q2. We anticipate a significant recovery in the third quarter, followed by a more moderate rise in Q4. In the next phase of this pandemic, governments will announce post-lockdown stimulus plans with a focus on infrastructure, public services and businesses in an effort to bring laid-off workers back into the labour market. Will we return to where we were in February? For some sectors in the “new economy”, the answer is yes. But for others like tourism and hospitality, the road back to normal will be a long one. Investors waiting for the return of a realistic baseline scenario will need to set their sights beyond 2020.

Patience and hope

Eventually, a new economic and investment cycle will begin and new investment opportunities will arise, even if it’s hard to believe that right now. In the meantime, it’s important to be patient and stick to your investment strategy while taking advantage of periods of market turbulence to rebalance your portfolios.