It has been said that “there are decades where nothing seems to happen and then there are weeks where decades happen.”
For many of us, it may have felt as though the events of a decade happened over the last quarter. The spring brought unprecedented change: Physical distancing, isolation at home and the voluntary shut down of economies. This led to equally unprecedented reactions. including oil futures prices reaching negative levels, entire industries being shut down, and record unemployment levels.
Similarly, equity markets caught many off guard, most likely because they fell and then rallied so quickly. Typical bear market cycles last between 18 to 36 months. Yet, this past spring, we saw one that was compressed into a matter of weeks. Record highs for the S&P/TSX Composite Index in mid-February were met by a decline of 37 percent by late March. But by the end of April, markets posted their best month since 1987.2
Now, economies are cautiously beginning to reopen. As the world moves towards some semblance of “normal,” perhaps we can reflect on certain experiences from the spring:
The world can be surprising. Sometimes the biggest risks are things that cannot be foreseen. In investing, this is why one of the most important roles we serve as advisors is to help identify and manage risks. This includes a primary focus on preserving hard-earned capital, while maintaining a disciplined approach to controlling risk within portfolios.
Setbacks can happen too quickly to ignore. But consider that progress often happens too slowly to notice. Since 1928, we have endured the Great Depression, a world war, recessions. market busts and lengthy bear markets. Despite many bumps along the way, the S&P 500 Index grew from around 13.4 to its current level of around 3,000— a compounded annual growth rate of over 6 percent, not including reinvested dividends. Time — if you can stick with it — has been a powerful force in investing as it can compound growth.
The world continues to change. Due to physical distancing and isolation efforts. individuals. companies and industries were affected both positively and adversely. The technology sector serves as an example, for which our increasing dependence as a result of isolation transformed certain players to be more defensive. As advisors, we are constantly monitoring investments based on current market conditions and navigating this changing landscape.
Global policy responses have been faster and deeper than ever. Throughout the crisis, some media reports have suggested a repeat of the Great Depression when projecting unemployment and GDP levels. However. our historic troubles may have been compounded by poor policy decisions: reduced liquidity and no fiscal stimulus in the initial years of economic decline!’ In contrast, today’s policy makers continue to do as much as possible to minimize the implications.
In the near term, economic data and earnings are expected to reflect the true impact of economic shutdowns. Ongoing market volatility can be expected as we continue to face new challenges: Recessionary economies, high unemployment, and continuing containment efforts. Despite the challenges, better times will prevail. In preparation, I believe a disciplined approach emphasizing quality, diversification and a solid plan is expected to serve investors well over time. Investors should stick maintain a longer-term view.