Light at the End of the Tunnel?

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Entering a week that the US Surgeon General warned would be "the hardest and saddest" in most American's lives, you might not expect a broad rally in global equity markets. But that's what we saw, with the Dow Jones Industrial Index gaining more than 1,600 points and the S&P 500 up more than 7%.

 Source: Bloomberg, April 6th

Today's gains were broad and unspecific, with gold and equity indexes both gaining. Virgin Galactic and Dollarama, which are very different companies, both closed up about 2%. That broad rally suggests a flight from safety, as investors who moved their money into cash last month are rotating back into the market. As we talked about in a previous email titled the End of the Beginning, the market is not rallying because investors are expecting sunshine and roses in the weeks ahead, but because they feel confident in estimating how bad things will get. Part of seeing light at the end of a tunnel is understanding that you're in a tunnel.

Expect Further Volatility, Even if COVID-19 Subsides

It's important to note that while we might see the most severe effects of COVID-19 in the next 14 days, we will continue to see its effects for months, even if the pandemic itself subsides. The knock-on effects of a pandemic are considerable, long-lasting, and not quite so neatly traceable as COVID-19 itself.

A good way to think about this is to just focus on healthcare. Even if today is the peak of the pandemic, the effect on the healthcare system will persist for months. A wave of fatalities will result from the scarcity of healthcare resources caused by COVID-19. A smaller wave of fatalities will result from the interruption of care for those with chronic conditions. Another, still smaller wave will result from an interruption in primary care and preventative medicine.

Shifting your focus beyond healthcare, it's clear that the resilience of the world's economy and institutions has been eroded by COVID-19. The food supply chain hangs in a delicate balance. Enormous financial resources have been mobilized, and cannot be mobilized again for some time. There are no real bullets left in the monetary policy gun. Political and legal institutions have ground to a halt. Every public resource is stretched to (and in some cases beyond) its limits. All these measures are necessary to meet the pressing needs facing the world right now, but deplete our ability to respond to future crises. The effects of this crisis could very likely ripple into the next crisis, in the form of decreased resiliency and capacity.

Ask yourself: what if there's another foreign policy crisis? What if there's an unrelated-to-COVID-19 financial crisis? What if there are more wildfires? What if there's a COVID-20? While COVID-19 might subside in the next few months, it will amplify the impact of future crises for a long time after confirmed cases drops to zero.

Market Outlook

Our near-term outlook is that while we're likely to see more big positive days like today in the future, we're also likely to see some big losses. As news comes in that confirms or undermines the thesis that COVID-19's effects are priced into the market, we'll see large swings in either direction.

We're recommending that clients first make sure that their cash position and liquidity is sufficient to weather some tough times ahead. After that, we're suggesting extremely conservative portfolios of large, dividend-paying companies that can still produce cash flow. We're not ready to dip our feet into the speculative game of picking the bottom, but we suspect that it's not yet behind us.

If you'd like to talk about these events or discuss your portfolio, don't hesitate to reach out to us at 604.643.0101.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.