indicatorMarket Commentary

Part 3: Brief market update March 2020

By ATB Investment Management Inc. 19 March 2020 4 min read

At the middle of the third week of March, the number of COVID-19 cases grew rapidly but so did the countervailing efforts meant to slow the virus’s spread.


The big pushback begins

North America, social distancing strategies quickly accelerated. The closing of classrooms, the emptying of offices as more employees began working from home, and restrictions on public gatherings and cross-border travel all intensified in a bid to slow the disease’s advance and limit its burden on the health care system. On March 16 the Canadian federal government announced that international visitors other than those from the United States will be denied entry into Canada. Three days later it was announced that the US-Canada border will be closed to non-essential travellers from either country, but will remain open for trade between the two countries. The Ontario, British Columbia and Alberta provincial governments all declared a state of emergency, which allows them to legally prohibit larger public gatherings, close bars, theaters, etc.

As rapidly as these changes have occurred and as difficult as it will be to adjust to them, it’s important to note that the majority of public health measures that can be enacted, have now been enacted. After the recent spate of restrictions, there is little remaining in our day-to-day lives that will need to change further.


The economic fallout

The short-term economic decline that will result from the heightened prevention efforts also weighed heavily on policymakers. Some changes have already been enacted to lessen the impact on those who, through no fault of their own, will be most heavily affected. For example, the Canadian federal government announced a large aid package consisting of nearly $30 billion of direct aid for, among others, those who cannot qualify for employment insurance or who don’t have access to paid sick leave, and also for small businesses. About $55 billion of tax deferrals were also included in the package.

The Alberta government announced a one-time payment to self-isolating individuals to help them bridge the gap until federal payments start in April. It also announced that utility payments can be deferred for up to 90 days, and that corporate income tax payments will be deferred until August 31. Furthermore, Canadian banks, and ATB Financial, announced that mortgage and other credit payments for personal and small business clients can be deferred, on a case-by case basis, for up to six months. More such measures will undoubtedly follow as the sacrifices required by many in order to protect the health and lives of all will not go unheeded.

The economic fallout of the enhanced efforts to slow the virus’s spread of COVID-19 will be negative and perhaps quite steep, but it’s equally important to note that they will be temporary. The virus’s public health impact will eventually peak and then wane, as will the economic slowdown that follows in its wake. For example, the number of new COVID-19 cases in South Korea has already been reduced to less than 100 per day from 500-800 per day in early March. Until the virus’s spread is brought under control and an effective vaccine developed, people across the globe will have no choice but to adapt to doing things differently. But adapt we will.


Central bank actions

In order to further blunt the potential secondary economic effects of the disease efforts, on Sunday March 15 the US central bank (the Federal Reserve, or “Fed”) cut its target interest rate an entire percent to the 0% to 0.25% range, the same range to which it was lowered during the 2008 financial crisis. We’re uncertain if low interest rates will solve a problem that wasn’t created by high interest rates, but the Fed and the Bank of Canada also announced additional “liquidity support” measures which we believe will prove crucial to keeping a health crisis and economic downturn from becoming a banking crisis. These additional measures will keep a “cash crunch” from developing in the banking system as more financially stressed businesses start to draw on their lines of credit, and as financially stressed depositors go in the opposite direction and withdraw from their accounts to help with their daily expenses.


Financial markets

If the Fed’s surprise rate cut was meant to reassure investors, it backfired and instead landed with a thud on Monday March 16 as North American stock prices fell nearly twelve percent for the day, ending slightly below their lows of the prior week. Tuesday saw a significant reversal as US share prices rose six percent, but Wednesday they turned sour again and declined by five percent. Daily stock price movements at or into double-digits in percentage terms, mostly down but some up, are quickly becoming old hat! However, most investors’ portfolio movements are much less than the headline stock index movements because they contain a significant allocation to bonds, whose price changes have been modest compared to stocks’.

Source: Standard & Poors

Same old refrain

The wild daily price swings of the stock market lead us to wonder whether enough investors have properly recognized the nature of the challenge ahead. On some recent days stock prices fell as though the end of humanity was nigh; on other days, prices rose as though this was all merely an April Fool’s joke. In our view, neither represents an appropriate or reasonable investment response.

Instead, an appropriate response is to stick to a long-term investment plan which explicitly accounts for both bumpy times and good. The gut-level emotional reaction to stock price volatility oftens involves the value-destroying practice of buying high and selling low. We think instead that plan that lets an investor continually participate in the long-term profit generating capacity of the world’s companies, while riding out their short term price gyrations, is a much better way to invest.