The first half of 2020 was one of the most volatile on record. Bear equity markets usually last over a year. The bear market of 2020 — if it is confirmed to be over[i] — will have lasted 39 days and was followed by a rapid recovery. In response to the COVID-19 crisis, the S&P/TSX Composite Index declined by 37% between February 12 and March 23, before rallying back by 38%. Canadian stocks are down 7.5% year-to-date, as of June 30. This same V-shaped market movement also occurred in the U.S., international developed and emerging markets. Even the bond market was briefly rattled. Liquidity momentarily disappeared, returning after the U.S. Federal Reserve came forward in support. The investors who sold their holdings of bonds and bond ETFs during those few days sold at deeply reduced prices.
The U.S. Federal Reserve and the Bank of Canada both reduced their benchmark interest rates from 1.75% to 0.25% and launched ambitious asset purchasing programs to support the economy. Ten-year government bond yields responded favorably by declining from 1.9% to 0.7% in the U.S. and from 1.9% to 0.5% in Canada. This decline in yields led bond prices to appreciate. The Canadian and U.S. federal governments have launched emergency spending programs equivalent to 12% of GDP. In Canada, the Minister of Finance estimates that the 2020-21 federal deficit will reach a record $343 billion. But the federal debt was quite low before the crisis. This means that the net debt-to-GDP ratio will increase to 49%, still a moderate level by international standards.
Economic data are generally slow to reflect such a swift drop of activity, but we are already observing a contraction in global employment, industrial production and retail sales. The world GDP contracted by 3% in the twelve months ended on March 31, and a larger decline could be on the way for the second quarter. Markets, however, have recovered after being stunned by the shutdown of the global economy. It seems that the fiscal and monetary response from governments and central banks reassured the markets enough to limit the damage from this public health crisis.
Here are our observations on asset-class returns (in Canadian dollars) in the first half of 2020:
- Short-term and total market Canadian bond indices produced solid returns of 4.0% and 7.5%, respectively.
- Canadian equity delivered a return of -7.5%.
- S. stocks returned 1.4% in Canadian dollars and -3.5% in U.S. dollars.
- International developed market stocks returned -6.9% in Canadian dollars and -10.5% in local currencies.
- Emerging market equity returned -5.1%.
- Large cap stocks outperformed small cap by a broad margin in the U.S. market.
- Value underperformed growth by a wide margin in all markets.
Our key risk management strategies have helped protect capital during this market crisis. Bonds — even in their worst days — outperformed stocks by a landslide. International diversification helped support portfolio values as foreign equities generally outperformed Canadian stocks when prices were declining. And the currency exposure associated with foreign stocks also cushioned the losses when it was most needed, as the U.S. dollar and other major currencies appreciated relative to the Canadian dollar.
There is no investment success without perseverance. While the vast majority of PWL investors were disciplined enough to maintain their portfolio in this crisis, not all investors had this type of persistence. For example, the New York Times reported recently that U.S. investors have withdrawn $326 billion from investment funds in March and possibly did not fully participate in the recovery. Investing is tough sometimes, and there will be other market crises in the future. Living through these crises is the price to pay to benefit from long-term equity returns. Going forward, PWL’s goal will continue to be to design wealth strategies that give our investors the confidence that they need to stick to their investment plan through thick and thin.
[i] Technically, the end of a bear market is confirmed when the index reaches a new high. As of June 30, none of the major regional indices that we track have reached that threshold despite the market’s extraordinary comeback.