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 21^st, 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.