The stock markets in 2020 have resembled riding a wild roller coaster for investors. Despite a very weak economic outlook earlier in the year due to uncertainty surrounding the coronavirus, major global stock markets have recovered most of their losses for the year. Investor sentiment seems to have improved due to several reasons:
- Government support: Interest rates have been cut to nearly zero in many developed economies. As well, governments have created many programs that have deployed billions of dollars of support for individuals, corporations and municipalities.
- End of lockdown: Many countries, initially led by China and Germany and later joined by the United States, have begun to slowly reopen their economies.
- Health care: There have been positive developments on the health care front. Reports indicate there’s a possibility the average length of time to develop a vaccine has been shortened along with encouraging news surrounding drug therapies.
The market recovery has been broad-based and not limited to any one country. In Canada, the S&P/TSX Composite Price Index has rallied 16.0% in the past 3 months for a year-to-date return of -9.1%. In the United States, the S&P 500, Dow Jones, and Nasdaq Price Indices have rallied 20.0%, 17.8% and 30.6% for a year-to-date return of -4.0%, -9.6%, and 12.1% in U.S. dollar terms. In overseas markets, international equities were up 14.2% in the last 3 months, in U.S. dollars as measured by the MSCI EAFE Price Index, for a year-to-date return of -12.6%.
In March, the Canadian mutual fund industry had its worst month ever, in dollar terms, as it saw more than $14.1 billion in net selling. Investors who followed a disciplined approach and stuck with their investment plan have seen their portfolios regain most of the losses. In times of uncertainty, it’s crucial to remain focused on your long-term goals and avoid costly mistakes that are often dictated by emotion.
The potential good news is that the worst is likely behind us. Social distancing measures, travel restrictions and a better resourced health care network mean we’re better prepared for potential future outbreaks of COVID-19. But the economic recovery will be gradual as we reemerge slowly and adapt to the new normal.
Historically, the bottoming period during a recession lasts for several quarters, rather than several months, and we believe this time is no different. Recovery may look like a two step forward, one step back process as economies slowly reopen, which will likely lead to market ups and downs over the coming months.
And so, the message remains the same: Remove emotion from decision making, focus on your long-term goals, and take the opportunity to re-balance your portfolio. Avoid selling investments when markets are low–instead, commit to investing smaller amounts on a regular basis over the next 6-12 months, to take advantage of potential market upswings while mitigating any downside risks.