Into the second week of March, financial markets continued to reflect extremely heightened emotions about the potential economic fallout from the spread of COVID-19. We review some of the main issues below.

Rise in COVID-19 cases

The number of people outside China diagnosed with COVID-19 increased from about 5,000 at the end of February to about 33,000 by March 9. This is very small in absolute terms but its rapid growth now has the undivided attention of governments across the globe, and many investors are concerned that the expanding efforts to slow its spread will also have significant economic effects. On March 9, for example, Italy announced what amounted to be a “lockdown” of the entire country in response to the rapid growth of cases.Precautionary moves by central banks

The US and Canadian central banks both responded to the ongoing financial market volatility by lowering their overnight interest rate targets a half-percent in early March. The banks all but acknowledged that interest rate reductions will not change the disease’s primary economic impacts. For example, people will consume and produce less than otherwise as they’re temporarily restricted to their homes to slow the disease’s spread. The same applies to the curtailment and cancellation of travel, conferences, large meetings, sporting events and other public gatherings. Interest rate reductions cannot and will not affect these effects.

However, fear in financial markets can be transmitted to the real economy and become self-fulfilling, mainly through the contraction of credit channels. The central banks’ rate cuts were meant to help diminish and prevent these types of secondary economic effects of the virus’s spread.

What happened to oil prices

The oil price fell to about $32 US on March 9 as Saudi Arabia announced plans to substantially increase its production. Share prices of North American energy companies fell by about 20% the same day, and the low oil price, if maintained, will also have a negative effect on Alberta’s economy. However, its effect on the Compass^TM Portfolios was muted because energy companies represent only about four percent of the stock (equity) component of each portfolio.What happened to financial marketsDaily stock price changes of three to four percent and even more became common in late February and continued into March, and have now lowered US stock prices back to where they were in March to June of 2019. Until investor emotions start to calm, we expect stock prices to remain volatile.

In contrast, bond prices - especially those of government bonds - continued to rise. Bonds are typically much less volatile than stocks, and their presence in balanced investment portfolios helped attenuate stock price choppiness. However, bonds’ long term return prospects became even more challenged in the last few weeks, as the implicit interest rate or “yield” of a 10-year bond issued by the Canadian federal government now hovers just above 0.5%.

In response to the current market situation, ATB Investment Management Inc. sold some of the bond holdings within the Compass Portfolios and placed the proceeds into stocks, because stock prices’ decline created the opportunity to rebalance the portfolios.

Investing through turbulent times

As efforts to contain the spread of COVID-19 redouble, it’s highly likely that economic activity will first slow and then eventually resume, in an almost-mechanical manner, as the public health effects first become more pronounced and then start to fade. Through it all, companies will continue to provide goods and services for society’s use.

As mentioned in our prior update, each downturn in stock prices or increase in stock price choppiness seems to come “out of the blue” if viewed individually, but when viewed on the whole is just part and parcel of owning company shares. Our advice to investors, consistent during both the bumpy times and the smooth, is to resist the haphazard switches that inevitably erode a portfolio. Instead, the proven path to investment success involves setting a long-term plan, using that plan to build an appropriate portfolio, and then holding to that plan through the inevitable ups and downs of financial markets.

To summarize: the COVID-19 economic impact will likely be mechanical but temporary, and a long-term investment plan that was appropriate one or six months ago remains equally appropriate today.