Part 2: Market volatility update March 2020
By ATB Investment Management Inc. 14 March 2020 3 min read
As the second week in March concluded, the real-life ramifications of COVID-19 came into closer focus and the financial markets continued to react in a way that challenged investors.
Rise in COVID-19 cases
The COVID-19 disease started to affect everyday life in North America in a more pronounced manner due both to its spread and also to the burgeoning efforts to contain it. For example, all travel from continental Europe to the US was suspended for 30 days, the NBA and NHL both suspended games indefinitely, Ontario announced it would close all publicly funded schools for two weeks following the March break, and the Canadian Prime Minister’s wife, Sophie Gregoire Trudeau, was diagnosed with COVID-19.
As the week ended, the Bank of Canada cut its target interest rate another half-percent and the Canadian federal government announced $10 billion of additional credit to businesses affected by COVID-19. The US federal government declared a national emergency, which will allow up to $50 billion of federal aid to be directed to state and local governments. We expect worldwide efforts to contain the virus to continue to intensify, along with additional government programs to help blunt the economic impact of the containment efforts.
How long will the economic impacts last?
Economic activity will change as a “new normal” comes into play - for a while. The widespread curtailment of travel and large gatherings, the much larger number of employees working from home, and the quarantine of those diagnosed with the illness will undoubtedly lower economic output. However, all these measures will be temporary: we don’t know how long it will take, but the virus’s threat will eventually pass, and the same goes for the containment measures and their economic impact.
What happened in the financial markets?
Stock prices swung wildly as investor sentiment alternated between panic and euphoria. For example, stock prices fell 10% the day after the US travel ban was announced. The next day, after the US federal government’s declaration of national emergency, the same prices rose 9%! Stock volatility (choppiness) is every bit as pronounced now as during the 2008 financial crisis.
Keeping things in perspective
It’s important to note that most investors’ portfolios contain a large complement of bonds and so are much less affected than headlines indicate. As of Thursday March 12 (before the Friday upturn), Canadian, US and overseas stocks respectively were down 18%, 22% and 26% for the year if measured in Canadian dollars. The Compass Maximum Growth portfolio, which holds only equities, was down nearly 21% as well but the other Compass portfolios’ declines were noticeably smaller. For example, the Compass Balanced Portfolio was down just over 11% for the year, and the Compass Conservative Portfolio was down only 3.5%.
What to do
At the risk of sounding like a broken record (for those who remember such a thing) or a CD on auto-repeat (for those of a slightly younger vintage), we reiterate our mantra that panic selling is the investor’s enemy and the destroyer of portfolio value. In contrast, sticking to a long-term investment plan - a plan that readily acknowledges the bumps that will occur along the way - is the proven path to investment success.
Conclusion - Walking our talk
Former heavyweight boxing champion Mike Tyson famously quipped that “Everybody has a plan until they get punched in the face.” Indeed, that’s why a workable investment plan must include the prospect of getting punched in the face!
We don’t give advice to others that we’re not prepared to follow ourselves. This isn’t the first time the Compass Portfolios have been ”punched in the face” by sharply falling stock markets, and each time we quickly got up “off the canvas” and adhered to our own investment process and long-term plan.
For example, as the US financial system collapsed between September and November of 2008, Compass’ stock holdings were gradually increased to their maximum weights in order to take advantage of declines that left many companies’ share prices barely half that of just a few months earlier.
Similarly, after the recent stock market drop, three times in the past two weeks we sold some of the Compass portfolios’ bond holdings and used the proceeds to buy stocks, in order to bring the portfolios’ stock weights back up to their targets. In the midst of financial market panic, we calmly followed our plan. Instead of futilely trying to guess the stock price direction for the next day, we executed a plan designed to work for the next decade. In short, we follow the same advice we’ve given investors, during the bad times and the good, over the last seventeen years.
This report has been prepared by ATB Investment Management Inc. (“ATBIM”) which manages the Compass Portfolios and ATBIS Pools. ATBSI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). ATBIM, ATB Securities Inc. (“ATBSI”), and ATB Insurance Advisors Inc. are wholly owned subsidiaries of ATB Financial and operate under the trade name ATB Wealth.
The mutual fund performance data provided assumes re-investment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Unit values of mutual funds will fluctuate and past performance may not be repeated. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATBIM, ATBSI, ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read the fund offering documents provided before investing. The Compass Portfolios and ATBIS Pools include investments in other mutual funds. Information on these mutual funds, including the prospectus, is available on the internet at www.sedar.com.
Opinions, estimates, and projections contained herein are subject to change without notice and ATBIM does not undertake to provide updated information should a change occur. This information has been compiled or arrived at from sources believed reliable but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. ATB Financial, ATBIM and ATBSI do not accept any liability whatsoever for any losses arising from the use of this report or its contents.
This report is not, and should not be construed as, an offer to sell or a solicitation of an offer to buy any investment. This report may not be reproduced in whole or in part; referred to in any manner whatsoever; nor may the information, opinions, and conclusions contained herein be referred to without the prior written consent of ATBIM.