Exogenous Shocks in the Market

Theo Bousalis - Apr 06, 2020


With a one-two punch of the global Coronavirus pandemic and an oil price war, equity markets are on their heels.  Volatility has increased and the market has been overcome with fear.  When the market becomes guided by panic, it is important to assess where we are, and what we might be able to expect from here.  At all times, fear trumps greed.  In the face of fear, it’s important to remember that panic is not a money making strategy.  It also helps to recall that previous periods of panic look like great opportunities, just not at the time it is happening.
A recession is upon us, as countries and companies take preventative steps to slow the rate of infection.  BMO Economics cut their 2020 Canadian GDP growth expectations to -2.8% and US to -1.2%.  Further, earnings estimates for the market have been revised downwards to reflect the reality of the coronavirus slowdown.  The big question is the length of the slowdown.  Meanwhile, governments worldwide have reacted quickly to ensure they stem the negative economic impact.  Lower rates from the Bank of Canada and US Federal Reserve should be accommodative to housing markets which are a major contributor to local economies.  Rebounds occur quite quickly after major sell-offs.  We suspect this time will be no different, albeit with starts and stops along the way.  First the volatility needs to settle down and the following initial measures will help.

  • Lower rates and oil prices increase cash flow flexibility.

  • China, a major contributor to global growth, seems to be getting ahead of new virus cases.  This should allow them to get back to work and help minimize supply chain disruptions.

  • The World Health Organization has recognized that coordinated action has been successful in controlling virus spread rates.

Extraneous Shocks to the Market
It is worth noting that markets have tended to rebound quickly from shocks like epidemics, armed conflicts and terror attacks.

It is the job of media  to report and inform.  For the most part they do a great job of it. COVID19 is deadly serious, we’ve never had to be concerned about the possibility of being on a ventilator as a result of getting a virus.  We know that with time, this will pass.  Very smart people and a lot of financial resources are being put to work to address this.  As that happens, Coronavirus will dissipate from the news.  Check out the Hong Kong Stock Markets response to news surrounding SARS.  As the news got less attention, their market went up.  Over time I suspect the same will occur with COVID19.

Going Forward

Of course no two shocks are the same and it will likely take months to understand the full economic fallout from the pandemic. As such, the markets are trading on headlines – be it new cases of the virus, fiscal/monetary policy responses, or statements around measures taken by world leaders.  We cannot control the headlines so we need to take the reins on what we can control.

  • Do our best to stay healthy – Both the Chinese and South Korean models have taken sacrifice.  In the case of China, there were drawn out quarantines that severely inconvenienced the population.  In South Korea, there was government surveillance that many Westerners would think as invasive.  We are yet to see the full extent of measures here, but it will inevitably involve sacrifice towards a greater good.     

  • Don’t panic. Like every equity market setback before it, this will pass. It takes fortitude not to react when volatility picks up, but avoiding the herding mentality bias is paramount to investing success. 

  • Stay committed to your plan. Through this commitment, investors will reach their long-term goals.

For clients who would like more information

BMO Capital Markets has been hosting informative podcasts.  Three we have found helpful,

  1. A Decrease in the Rate of Increase - As the number of confirmed coronavirus cases and deaths due to COVID-19 jumps across North America, there is reason to believe the rate of increase in fatalities is slowing, Dr. John Whyte, Chief Medical Officer for WebMD, told a BMO Capital Markets conference call this week.  You can find it here.

  2. Investors have a Choice: Faith or Fear - There is no denying that headlines, fear and rhetoric surrounding the coronavirus (COVID-19 virus) have become the primary driver of investment performance the past several weeks. While the duration and volume of COVID-19 virus-related news is yet to be determined, BMO Capital Markets Chief Investment Strategist Brian Belski continues to counsel investors to control what they can control.  You can find it here.

  3. BMO Experts Perspectives: COVID-19 Economic and Social Impacts - Global Insights from BMO Global Asset Management, BMO Economics, BMO Asia and Dr. John Whyte MD from WebMD.  You can select it from a list of podcasts here.

We’ve also posted publications from our Portfolio Advisory Team.  They can be found in the publications section of the site.