2020 Q1 Market Summary and Outlook
Global equity markets posted a steep decline after steps taken to curtail the spread of COVID-19 shut down large portions of economic activity and created a massive global demand shock. Within weeks of the S&P 500 and S&P/TSX Composite indices touching all-time highs, the benchmarks retreated more than 30%, experiencing some of their largest one-day moves ever along the way. Governments and central banks around the world stepped in with extraordinary actions designed to avoid a freeze-up of credit markets, and to support both individuals and businesses. The Bank of Canada joined with the U.S. Federal Reserve in emergency interest rate cuts that brought target rates close to zero, and yields on 10-year and 30-year Government of Canada bonds and U.S. treasury bonds fell to record lows. A weaker Canadian dollar late in the period boosted returns from international holdings.
Oil prices tumbled dramatically. As demand plummeted, Saudi Arabia and Russia announced plans to boost production in a battle for market share. West Texas Intermediate crude (WTI) fell to as low as USD $20 per barrel, and the Canadian benchmark – Western Canada Select – dipped below USD $4 per barrel, its lowest level ever. The loonie dropped to below USD 69 cents, its lowest level in more than 16 years. Gold, which is usually considered a haven in turbulent times, was temporarily driven lower by margin calls (investors selling to cover losses in other asset classes) before bouncing higher as the period ended.
As equity indices moved into “bear market” territory, the technology sector outperformed due to relative strength from heavyweights Apple Inc. and Microsoft Corp. in the U.S. and Shopify Inc. in Canada. The interest rate-sensitive staples and utilities sectors outperformed as a result of declining bond yields. Energy stocks weighed heaviest on returns as oil prices fell. The financials sector was especially weak due to falling interest rates and the rising risk of loan losses as the economy slowed.
Internationally, European markets generally underperformed, while those in the Asia-Pacific region tended to outperform. As Italy emerged as the epicentre of Europe’s COVID-19 cases, that country’s economy was hard hit. U.K. equities underperformed as Britain formally exited the European Union. A massive stimulus proposal boosted Japanese stocks, allowing them to outperform despite the decision to delay the Summer Olympics in Tokyo. Hong Kong stocks outperformed after the epicentre of the coronavirus crisis moved from China to Europe.
Government bond prices rose globally as yields dropped, but corporate bonds fell, resulting in net losses for most fixed income indices, and an overall flat performance for the FTSE Canada Universe Bond Index Total Return. Long-term government bonds, which are more sensitive to rate declines, outperformed short-term and mid-term government bonds. Corporate bonds fell, even in the investment grade sector, when the sudden strains in the global economy resulted in a rapid increase in corporate spreads to reflect the economic risks. Debt securities in the less credit-worthy high yield bond and loans markets performed even worse, behaving more like their equity counterparts and registering significant losses.
Volatility in global asset prices is likely to remain elevated for some time, but the worst of the uncertainty, at least in terms of policy response, may now be behind us. Investors will now focus on the path of coronavirus infections as the determining factor in the sustainable recovery of the economy and earnings. The full economic impact of COVID-19 remains unknowable. The scope, severity and duration of the crisis are uncertain because officials still can’t accurately predict the rate of infections and spread of coronavirus. However, most experts believe that, because the underlying economy was fundamentally strong going into the COVID-19 crisis, a recovery in the second half of 2020 is the most likely outcome, given the extent of the monetary and fiscal policy response directed at reviving growth.