With fall and winter approaching, children back to school, day cares open, and people slowing returning to the office, the question everyone is asking; Will there be a second wave? And if so; What will happen to my portfolio?
The good news is that a second shutdown may not be likely, given data on the recent death rate from the virus. In a recent report last Wednesday, National Bank Financial, Inc. assessed the number of Covid-19 cases versus deaths in North America and Europe. That analysis showed that a recent increase in cases hasn’t resulted in a surge in deaths compared to March and April. While the increase in cases may partly be explained by improved testing, changing demographics may also be a factor in explaining the lower death rate, the report said. For example, the virus is spreading more among younger people, who tend to have less severe symptoms, while seniors and others at risk are taking greater precautions. For these reasons, analysists remain confident that a second economic lockdown is unlikely. National Bank’s base-case scenario is that strategies to address a second wave of Covid-19 would likely focus on limiting victims without crimping the economy.
None of us want to see a repeat of the global shutdown we experienced last March. However, with the economy reopening and no vaccine yet available, the possibility can’t be ignored. Canada’s GDP dropped 38.7% year over year in Q2 but has since rebounded strongly. The economy grew by 4.8% in May and 6.5% in June, with preliminary estimates for July also looking strong. Yet, a continued recovery assumes that any future wave of the pandemic requires “a lighter containment touch” than was necessary to flatten the first wave, said RBC Economics in a provincial report last Thursday. In addition, the same report stated it could take the economy years to recover lost ground.
Even without a second shutdown, economies are not expected to return to pre-Covid-19 levels of output this year. Whether a full economic recovery can happen next year depends on a vaccine, as well as on people being able to return to work.
In terms of portfolio performance, we ended 2019 with a solid risk-adjusted returns. The trend continued at the beginning of 2020 until the “lockdown” which resulted in an unprecedented decline in the markets and subsequently our portfolios. March 23rd was the technical low point of the markets and you saw this decline on your March 31st statements. At that time, unprecedented fiscal and monetary stimulus measures were implemented in the form of record low interest rates, and Government subsidies such as CERB, and CEWB. This in effect placed a floor in the market and since then we have seen a reversal of fortune. Your June 30th statement was higher, and this trend is continuing which you will soon see on your September 30th statements. As a result, most portfolios are now flat or slightly positive for 2020. When you compare this to the market indices, aside from Technology and Gold (higher risk asset classes), virtually all indices are negative for 2020. Moreover, when you compare this market to the financial crisis of 2008, that year the market indices were down –20% or more, which now seems like a distant memory.
This fall, I believe we should be prepared for a rise in COVID-19 infections in at least some parts of the world and therefore, the possibility of some moderation in economic growth. However, that does not mean we should become myopic and pessimistic about the economy and markets. History shows – out of pain comes gain; this crisis like many before it is creating a wide array of opportunities for future growth. As investors, we should not focus on the events over the next month or two but continue to make investment decisions based on what is best for our portfolios over the next 3-5 years and beyond.
Have a great week,
Tracey
Source: National Bank Financial Inc., RBC Economics, Invesco Ltd