Coronavirus (COVID-19) and it’s economic impact; a Black Swan event
When the virus was largely confined to China, North American investors didn’t pay much attention. But when cases in Italy grew, they became concerned. If people cannot go to work, due to sickness, quarantine or school closures, there will be economic disruption. As such, stock markets are down more than 20% from their record highs. In good news, the bonds in your portfolio have done their job and tempered the losses in stocks.
Before the virus, stocks were expected to return about 5% in 2020, with average risk. But now we are faced with disruptions to both supply and demand. Businesses will produce less, while consumers limit their spending, travel less and stay home. In addition to problems created by the virus, both Saudi Arabia and Russia look poised to produce as much oil as possible. This isn’t particularly good for either nation or Canada. It could flood the market with oversupply, leading to a full-blown oil price war.
Before the virus, the estimated price of oil for this year suggested positive earnings and growth for Canada. But with the virus and plunge in oil prices, those bets are off. Notwithstanding growth in other sectors (especially tech) oil is still too important for the Canadian economy and our recovery will be hindered. The more diversified US economy may fair better in relative terms.
Due to closer ties to China, the Eurozone was already slowing by January. The U.S./China trade war and the current supply chain disruptions will only delay the recovery. A rebound in Europe depends on a rebound in China. In the meantime, the European economy will be susceptible to recession, and earnings growth, overall, will continue to be modest, at best.
Investing is a long-term commitment. No one can predict risk or what will drive the markets through a correction. All anyone can do is manage risk. The current volatility is not expected to be a full-blown depression and once this virus runs its course, we will recover; both physically and economically.
Your portfolio has been designed with your situation, goals and risk tolerance in mind. Investing during bad times can challenge your discipline and commitment but there are principles that can keep you focused on the long term: stay invested, diversify across countries and asset classes, and remember that markets always go up in the long term.
If you want to speak to me about your investments, please don’t hesitate to contact me at 604-565-9607 or casey@camlife.ca.