From the CIO Office of National Bank Investments - Louis Lajoie
Global equity markets extended their losses Thursday, as the acceleration of new coronavirus cases outside China raised investors' concerns over its potential ability to inflict a major negative shock to global growth. As of this writing, U.S. equities stand ~12% below their all-time which brings the index back to its mid-October 2019 level.
First and foremost, it should not be forgotten that it is in the very nature of stock markets to experience bouts of heightened volatility and fear. For instance, since 1990, the U.S. stock market has experienced an average annual correction of ~13% in spite of finishing higher 24 out of 29 years by an average of +11%. Indeed, this simple statistic illustrates that letting emotions take over and selling in times of heightened uncertainty is generally the best way to ensure heavy losses, as this strategy often rhymes with selling low and missing the rebound.
That having been said, we do not take the situation lightly. The recent emergence of additional Covid-19 cases outside of China materially increases the risk of a more pronounced hit to global growth and, consequently, clouds the near-term outlook for equity markets. As such, the next few weeks are likely to remain abnormally volatile as markets assimilate the first series of post-coronavirus economic data – which will undeniably be weak – together with the extent of the contagion.
All is not doom and gloom, however. The number of newly infected people in China is decreasing day by day, while those of recovered cases continue to climb, indicating that the virus can be contained if adequate measures are enforced. What’s more, we continue to view the fundamental economic and monetary backdrop as supportive of equities over a longer investment horizon. The economic impact of a pandemic remains, by definition, transitory, and we should not underestimate governments and central banks’ capacity to rapidly announce stimulative measures should the situation worsen. As such, once the worst of the coronavirus outbreak passes, equity markets are likely to experience a sharp recovery on the back of easier monetary and fiscal conditions.
** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **