The Coronavirus: A Mid-Quarter Update
The following is a brief analysis of what we see occurring in the markets right now as a result of the COVID-19 outbreak in addition to a variety of resources we have found useful. Please do not hesitate to call us if you have any concerns about how the current market downturn is impacting your portfolio.
The Market Response to COVI-19 (aka The Coronavirus)
Beginning on February 21st, the market response to the outbreak of COVID-19 has been brutal for stocks. Providing an up-to-date illustration of market performance is challenging due to the extreme volatility. That said, the graph below on the left will give you a sense of how broadly markets have been impacted.
Two major points have been hammered during the sell-off: stocks are falling and bond yields are falling. The graph above on the right indicates the drop in yield on various government bond offerings. This sounds like a nightmare as it is presented in news reports but it is actually an indicator of a healthy financial system. Be careful not to confuse falling bond yields with falling bond prices. Core bonds (investment grade, government, and mortgage-backed securities) represent a large portion of investments for anyone with a moderate or more conservative long-term outlook. Those bonds serve two main purposes in an investment portfolio – stability when markets are reeling and yield for current income. A flight to safety is occurring, lowering yields and increasing the value of the bonds we hold. This is a good thing, unlike 2008/2009 when there seemed to be no safe place to go but cash.
The blue line in the graph above is the S&P 500 over the last several weeks. As concerns surrounding Coronavirus has increased, it has dropped precipitously. The purple line is the iShares Aggregate Bond Fund (AGG), a core bond holding which we hold for many of our clients. During the same time period, it has held steady or risen slightly. This is encouraging because it means the bonds are performing their intended purpose inside of our portfolios. We are provided with an opportunity to rebalance and re-invest while markets are in flux.
There is a big unknown looming as to how long and how economically impactful COVID-19 will be, but financial markets and our portfolios are working as intended. From a humanitarian perspective, there is nothing more we could want to hear then that there is a successful Phase-1 drug trial that stops the virus in its tracks. That is the best-case scenario where the personal and economic toll from this outbreak is cut short and healthy economic growth can continue. Absent this news, we are keeping an eye on a variety of indicators. First, for markets to shrug off bad news and maintain stability. This would be an indicator that markets are working efficiently and have priced in most of the economic impact of the virus. Second, and more significantly, for the volatility in stock prices to creep over to the bond markets. This would be a bad sign for financial markets and would be a serious cause for concern.
We highly recommend the following video to gain more insight into how COVID-19 works and what to do to prevent yourself from getting it. Dr. Peter Lin in conjunction with CBC News, Canadian Broadcasting Corporation, prepared an excellent breakdown of the virus and how to prepare yourself.
We are here to help you make rational, informed and well-reasoned decisions, and we thank you for your continued trust and support. Your input is always welcome, and we ask that you contact us with any questions or concerns.
All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards.
Investing in securities in emerging markets involves special risks due to specific factors such as increased volatility, currency fluctuations and differences in auditing and other financial standards. Securities in emerging markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
An index is a statistical measure of the change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value. An investment cannot be made directly into an index.
Investing in fixed income securities involves credit and interest rate risk. When interest rates rise, bond prices generally fall. Investing in commodities may involve greater volatility and is not suitable for all investors. Investing in a non-diversified fund that concentrates holdings into fewer securities or industries involves greater risk than investing in a more diversified fund. The equity securities of small companies may not be traded as often as equity securities of large companies so they may be difficult or impossible to sell. Neither diversification nor asset allocation assures a profit or protect against a loss in declining markets. Past performance is not an indicator of future results.
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