By Marc De Leeuw
If the start of 2020 has taught us anything, it’s that no one has 20/20 foresight. That’s particularly true when it comes to market forecasts. At the end of 2019, the S&P/TSX Composite Index had returned 23 per cent for the year. Interest rates, unemployment, and inflation were all low, prompting predictions for another year of positive returns.
By March, everything had changed and the world was roiled by two “black swan” events, unforeseen or unexpected. Not only did the World Health Organization declare COVID-19 a global pandemic, but Saudi Arabia and Russia began an oil price war.
In the following weeks, the price of Canadian Western Select fell to five dollars a barrel and West Texas Intermediate fell by more than 65 per cent. Although the two countries ended the price war in April, the damage was already done.
STOCK MARKETS CLIMB WALL OF WORRY
In the wake of these black swans, equity markets around the world plummeted into bear market territory. By the end of Q1, the S&P/TSX was down 20.9 per cent, while international markets, as represented by MSCI EAFE, declined by 22.8 per cent in U.S. dollar terms and 15.3 per cent in Canadian dollar terms. By May, most global economies were in recession.
Yet, while it may sound dire, the decline only marginally interrupted the positive long-term direction of equity markets since the lows of the Great Financial Crisis (GFC) in March 2009. In mid-May 2020, the S&P 500 index stood at 2,963 – well above its March 2009 low of 770, even taking the dramatic decline of March 2020 into account.
BOND MARKETS WERE NOT IMMUNE
For their part, bond markets still marked modest positive returns for Q1 despite the near collapse in liquidity in the credit markets. As a result of this, both the US Federal Reserve and the Bank of Canada reduced their policy rates by 150 basis points. The U.S. Federal Reserve resumed the quantitative easing (QE) program begun in the GFC and the Bank of Canada launched its own QE program for the first time. Both central banks committed to purchasing not just government bonds, but also corporate (and in the case of Canada, provincial) bonds in a coordinated effort to restore stability to the credit markets. As the turmoil affecting the credit markets continued, the corporate bond buying programs extended to just below investment grade bonds.
The central bank interventions worked to the extent that bond markets eked out modest positive returns again in April.
With summer cresting, the restrictions on people and economies are cautiously being lifted around the world, yet the global economic outlook remains murky. Whether or not a second (or third or fourth) wave of COVID-19 cases erupts, near-term market volatility seems certain. In this light, staying the course in investing can be a challenge.
What does this all mean for investors?
Organizations that had strong operational foundations before the market tumble this spring will likely emerge with those foundations intact. Similarly, those capable of responding to change with agility will likely have found themselves equally resilient. Here’s how you can do the same.
EXPECT (AND MITIGATE) THE UNEXPECTED
Consider the example of Association “X,” a not-for-profit housing association. Before investing its capital reserves, Association X decided that a thoughtful, considered investment plan would be the key to their investment success. Association X realized that a strong investment plan would need to address both short-term cash flow needs and long-term spending. And importantly, they realized that the plan would need to create the foundation for growing their capital reserves in order to fund their long-term spending requirements. Association X also realized that a strong investment plan would factor in uncertainties – uncertainties in spending and in capital markets.
Association X also realized that working with an investment professional would be important for helping them to define their investment goals, risk tolerance, and time horizon – the three pillars of a properly crafted investment plan.
Working with their investment professional, Association X developed a strong investment plan that reflected their particular capital needs, their investment goals and their tolerance for risk. With the help of the investment professional, their plan also considered the impact of a range of economic and market scenarios that could have deleterious consequences for their capital reserves. Armed with their well-thought-out investment plan, Association X has been able to weather the recent turmoil knowing that their plan considered outsized market events.
Don’t have an investment plan? Don’t worry. It’s never too late to start.