A MESSAGE FROM SIGHTLINE REGARDING COVID-19
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COVID-19 Market Update: The Virus and Volatility Spreads

Over concerns of global economic activity unraveling, on Sunday, March 15, the Fed moved aggressively to shore up both the US and global economies by dropping rates to near zero, promising billions in asset purchases and support for foreign central banks with cheap dollar financing. Fed Chairman Jerome Powell acknowledged the impact of the coronavirus on economic activity, particularly within industries like travel, leisure and their associated sectors. Uncertainty of the depth and length of the economic slowdown precipitated the move. “The economic outlook is evolving on a daily basis, and it is depending on the spread of the virus,” Powell said at the end of an emergency Fed meeting.

Stocks responded the following Monday, March 16, with the largest one-day percentage loss since 1987 on the Dow over concerns of the economic impact of the coronavirus. As the week dragged on, there was little improvement, with the S&P losing 400 points, bringing its year-to-date (YTD) return to -28.66%. The Dow fell 4,011 points, bringing its YTD returns to -32.81%, and the S&P TSX lost nearly 800 points, resulting in YTD returns of -30.54%. Circuit breakers, while slowing the fall, were unable to arrest the steep decline partially caused by tripped algorithm selling programs.

Despite the actions of central banks and government fiscal programs to assist businesses and families most affected by the virus, markets accelerated to the downside. Zero-interest rates for over four years in Europe have not stimulated economic growth and are likely to have the same result in North America. The equity markets are focused on the virus and the effect on global economies. At this juncture, low rates will not stimulate spending but will provide support and liquidity to the financial sector.

Volatility has extended into the bond market as well. Ten-year US treasuries decreased to just under 70 basis points after the Fed announcement, then jumping as high as 1.25% mid-week before finishing the week at .95%. Short-term Treasury yields decreased as the long end increased, sending the yield curve steeper than the last 12 months. As represented by bond ETFs, investment grade, high yield and emerging markets are all impacted by the same virus forces as the equity markets. The flight to safety is on the short end of the curve, at least for the moment.

It is hard to say what this week will bring. The core worry is, of course, the coronavirus and the resulting impact of slowing economic activity on various sectors of the economy as the virus spreads and state- and country-wide lockdowns expand. As we have seen in previous weeks, the impact of several ancillary factors is contributing to the volatility over the last four weeks, including:

  • the fear of a socialist gaining the nomination of the democratic party,
  • the first emergency cut in rates by the Fed to stall the falling equity markets,
  • the failing negotiations between Russia and Saudi Arabia over oil productions cuts, and
  • the second rate cut to near zero by the Fed.

Stimulative fiscal measures have had the opposite effect of calming the markets. Until the virus is contained, we should expect to see continued volatility in both equity and fixed income markets.

 

Warren Gerow
Senior Investment Consultant to Sightline Wealth Management

 

 

Important Information:

Warren Gerow is an independent consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

Sightline Wealth Management LP is a wholly owned subsidiary of Ninepoint Financial Group Inc. (“NFG Inc.”). NFG Inc. is also the parent company of Ninepoint Partners LP, it is an investment fund manager and advisor and exempt market dealer. By virtue of the same parent company, Sightline is affiliated with Ninepoint Partners LP. Information and/or materials contained herein is for information purposes only and does not constitute an offer to sell or solicitation to purchase securities of any issuer or any portfolio managed by Sightline Wealth Management or Ninepoint Partners, including Ninepoint managed funds.

The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavors to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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