Financial markets have exhibited high levels of volatility over the past several weeks as they react to factors that include reduced interest rates, a steep decline in oil prices and the economic and business implications of the coronavirus (COVID-19) outbreak. We are writing today to provide you with some further perspective on these developments and what the market’s fluctuations may mean for your investments in the longer term.
What are the most recent market developments?
Concerns about the spread of the coronavirus on business activity are weighing heavily on global asset markets, and central banks have moved to support the global economy with lower interest rates and other monetary policy measures. The U.S. Federal Reserve (Fed) has made two emergency cuts to its policy rate, bringing it to a range of 0-0.25%, and has announced a US$700 billion security purchase program to inject liquidity into the financial system (quantitative easing). The Bank of Canada has also cut rates twice to support the Canadian economy, reducing its overnight lending rate to 0.75%, while the G7 group of countries announced that it would be willing to use “all appropriate policy tools” to provide economic support amid the ongoing COVID-19 outbreak.
Also affecting financial markets has been a disruptive oil price war. Saudi Arabia and Russia announced plans to raise production, reducing prices in an attempt to gain market share. As the number of cases of COVID-19 surged worldwide, triggering progressively stricter government policies and business responses such as social distancing, travel bans and the suspension of professional sporting events, markets have gone down in response.
How should I react?
On an emotional level, it can feel very difficult to adhere to a long-term financial plan when faced with daily volatility and a stream of negative news. It is natural to be concerned about the value of your portfolio, apprehensive about what the future will bring, and tempting to make changes. As hard as it is to remind ourselves amid such volatility, market declines are a normal part of investing. Severe corrections like the one we are now experiencing are less common but have been an occasional occurrence. Although the timing is unknown, such setbacks have historically been temporary, and stocks have inevitably recovered.
That is why it is important to take some comfort in the fact that your portfolio is diversified. A portfolio that is diversified by asset class, sector and region will have more stable returns, because not all investments provide the same returns at the same time or respond to events in the same way. A well-diversified portfolio geared toward your financial goals and risk tolerance is still the best defence against this type of volatility in the marketplace. A downturn in the market can be uncomfortable, but it’s no time for hasty actions. The key is to look beyond the short-term volatility and to envision the recovery.
For some perspective, we’ve included a chart below which outlines the market’s performance during viral outbreaks over the last two decades, as well as the 12-month return which followed. We believe it is important to keep this data in mind when the markets feel as turbulent as they have recently.
We hope that this letter has provided you with some useful information and strategies to help withstand market volatility. Our advice is to stick with your long-term investment plan, which was carefully constructed to reflect your personal objectives and investment time horizon.
At times like these, it is only natural to ask questions about your portfolio results and overall financial plan. If you have concerns about your portfolio, we are here to address them. Please do not hesitate to contact us at (905) 572-7526.
Stephanie Piroli, CPA, CGA, CFP
& Priscilla Monteith, CPA, CGA, CFP
Source: CI Investments, Signature Global Asset Management, Cambridge Global Asset Management, Globe and Mail, National Post, Bloomberg Finance L.P., Yahoo Canada Finance, and Trading Economics.
If you're interested in more reading regarding the COVID-19 please check out this article here.