A tale of two quarters

By ATB Investment Management Inc. 26 August 2020 6 min read

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, … it was the season of darkness, it was the spring of hope.”

This famous opening quote from a “Tale of Two Cities” by Charles Dickens served to paint the stark contrast between London and Paris during the French Revolution. It also presents an apt introduction to the experience of investors so far in 2020. Not only have we experienced one of the sharpest market declines in post-war history and record unemployment rates but in the same half of the year, we also saw one of the greatest market recoveries.

It very literally was the worst of times, followed quickly by the best of times that modern day global markets have experienced. During these six months, investors witnessed two very different quarters and this is where our tale starts.

When we woke up on New Year’s Day 2020 in Canada, markets were healthy, employment numbers were strong and economies were working at full capacity. Whispers of COVID-19 cases came up in discussions among friends and stories were surfacing on the evening news. It wouldn’t be too long before the markets would experience significant turmoil and our investment portfolios would begin to feel the effects of the virus uncertainty on markets.


The first quarter

In January, Chinese tourism declined over the Lunar New Year holiday, which would typically be a very busy time for the industry. This was an early indication that patterns in normal behaviours, like travel, would shift if and when the virus arrived in Canada. At this time, Canadian markets were largely ambivalent to the shifting global landscape. The Bank of Canada held its target interest rate steady at 1.75% and the S&P/TSX returned 1.7% for the month of January—a modest return to kick off the year.

By the time February arrived, the world was watching cases of COVID-19 rapidly escalate in Italy, the first of many lockdowns to come, and mounting concerns in the United States surrounding trade deals with China. In Canada, we were experiencing blockades and protests against pipelines that were shutting down train lines and the S&P/TSX posted negative returns of -5.9% in response to this uncertainty.

After experiencing sharp declines through to the end of March 2020, we took a critical look at the difference between risk and volatility and the benefits of portfolio diversification in the face of rapidly changing markets. You may remember the chart below that highlighted the year-to-date performance of various investments.

In addition to the diversified CompassTM Portfolios, the green line was included to reflect the performance for the S&P/TSX Composite Index, which is a broad market index that represents the performance of over 250 of Canada’s largest companies, like Air Canada, Loblaws, and Telus. After seeing this chart at March end, it would be hard to predict the strong quarter that these investments would experience in the following three months.

Source: ATBIM, Bloomberg

The second quarter

A very different story can be told during the second quarter of 2020 where investors were hopeful and the fear of the first quarter slightly dissipated. Contributing most to the rally in the second quarter for Canadian equities were the Materials and Information Technology Sectors. Much like fear of the unknown drove the sell off in March, budding enthusiasm over the reopening of the economy, the development of a vaccine, potential growth, and search for yield drove purchases in the second quarter.

Shock waves were sent through the Canadian market when crude oil prices briefly dipped below $0/barrel in April. This had an enormous impact on the stocks of energy companies in the second quarter, as you can see in the dip of Suncor’s price early in the chart below, but diversified portfolios took this volatility in stride.

Source: ATBIM, Bloomberg

In only two quarters, markets experienced a global pandemic, chaotic crude oil prices and trade tensions among world superpowers. Yet, we sit today with Canadian and US equity markets nearly recovered to pre-pandemic levels.

We had never been through a pandemic or seen negative crude oil prices in our lifetime, but the improvement of markets in the second quarter proves that markets are resilient. They represent the value of actual companies that are selling actual goods and services, even in the face of geopolitical uncertainty.

If one company is unable to operate at normal or increasing capacity (think Air Canada), their stock will suffer, but there will always be companies who can experience growth even during difficult economic times - think of the influx Loblaws and Telus experienced while more people were stuck at home.


Takeaways for investors

These last two quarters have left some important takeaways for investors:

  • Investing and uncertainty go hand in hand.
    • There are many emotions associated with investing in volatile markets. Building a financial plan that is based on the expectation of these challenging times can help investors to stay the course and remain focused on their goals.
  • Negative returns are normal
    • Negative returns are a normal part of investing. The average intra-year decline for the S&P/TSX between 1982 and 2019 was -14.17% whereas the average annual return was 7.0%. This is why it is crucial for investors to be honest about their risk tolerance and align that with the investments they choose.
  • Averages mask volatility
    • Just like things can look worse by considering a short time frame for an investment (like looking at Suncor in the first quarter of 2020), they can also look really easy when looking at a long-term average (like the 7% average annual return of the S&P/TSX). This can make long-term investing seem easier on the surface. Sure, it is true that the Canadian index has returned an annual 7% from 1982-2019 but investors would only realize this return if they were able to stay invested throughout steep declines such as the -49% decline in 2008 or -30% in 2001.
    • Considering the long term historical return of an investment does not guarantee future positive returns, but it will give you an idea of what the portfolio has experienced historically. Looking at intra-year declines (such as those mentioned in 2008 and 2001) can also paint a picture of what an investment might experience again over the long-term.
  • The stock market is not the economy.
    • Though they are talked about like twin siblings, the stock market and the economy are different. The stock markets represent companies that are valued on a forward-looking basis. This is best represented by the improving markets of the second quarter. When it was clear that companies could slowly start reopening, lockdowns were lifted and many people were heading back to work, investors priced this into stock prices on a forward-looking basis. The economy, however, is represented largely by employment numbers and GDP. Although these can be forecasted, they are backwards looking and true data is often delayed due to a lag in reporting.


The best of times and worst of times might be in the rearview mirror for 2020, but that is not to say we won’t see them again. This tale of two quarters exemplifies how quickly markets can change, and it is an opportune time for investors to review their portfolios to ensure they will be comfortable staying invested during the volatility we will inevitably see again in the next 10, 20, or 30 years.

A global pandemic is hopefully something we don’t experience again in the future, but similar volatility from a very different global shock will appear. Being prepared for this kind of shock and understanding what it will take to stay invested for the long term is a critical part in building a successful long-term investment plan.

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