As many of you will be aware from the heightened media attention, uncertainty regarding the spread of the coronavirus, or COVID-19, and its potential impact on the global economy has led to a material sell-off in global stock markets over the past few weeks. While we do not want to undermine the human tragedy of such an outbreak, we felt it was important to provide some perspective on recent events. COVID-19 is a serious health risk for the world, but so far has impacted a much smaller segment of the global population than the common flu virus, which typically infects 3-5 million people and results in more than 650 thousand deaths annually.
Year-to-date, the S&P/TSX and S&P500 (in Canadian dollars) have declined approximately 24.7% and 14.6% respectively. The magnitude of the drop in only a few weeks has been unsettling. From a slightly longer-term perspective, the recent losses serve to reduce the strong returns earned in the last year with the S&P500 advancing more than 30% since the end of 2018. Global stock markets had been on an extended winning streak and were long overdue for a correction—although the magnitude of this decline is far more than normal.
For those of you who read our quarterly “Insights” publication will know that we have been gradually lowering risk in our clients' investment strategies over the past several months. First, by reducing the weighting that they have in stocks, in their overall portfolio. Secondly, by shifting some of the client's equity exposure into a new asset class called Real Assets, which invests in global real estate and infrastructure. Clearly, we did not predict the coronavirus outbreak, but we were concerned that some unknown event could come along to disrupt the upward trend in the stock market. In hindsight, such actions have helped to protect clients' investment portfolios during the recent market downturn, and we will continue to monitor the situation closely to see whether further adjustments are required.
Although it is too early for anyone to know how COVID-19 will impact the global economy, previous epidemics such as SARS, avian flu, and H1N1 should provide some clues. Health scares typically interrupt economic activity for a number of months before pent-up demand leads to a substantial rebound. Specific industries such as travel and leisure are normally hit the hardest, but China’s growing role in today’s global economy and its importance to the world’s supply chain will likely result in disruption for more businesses. However, governments and central banks in various countries are also poised to follow China’s lead in providing financial measures to support regions that are most at risk. The underlying fundamentals of low interest rates and strong employment continue to support an eventual continuation of the economic recovery and further upside in global stock markets.
Such times of increased volatility and uncertainty are never enjoyable; unfortunately, they are a reality for all investors. We have been through many periods like this before and will face many more in the future. The most extreme market downturns may test the resolve of some investors, but we encourage you to adhere to the discipline of a long-term strategy. No one has demonstrated an ability to consistently add value to their investment portfolio by attempting to time the markets, but many investors have done themselves harm. If you have a well-diversified investment strategy with an appropriate combination of fixed income and equity securities to meet your long-term objectives and risk tolerance, you should not be worried about short term fluctuations in the value of your investments.
— The Bellwether Portfolio Management Team —