Hey there, time traveller!
This article was published 7/3/2020 (359 days ago), so information in it may no longer be current.
The panic in the markets over the spread of COVID-19 has indeed been alarming.
Still, few should be surprised a forest fire broke out in tinder-dry conditions.
In the early stages of this unfolding global health crisis, the markets remained weirdly buoyant, a sign of often irrepressible, irrational exuberance of late-stage bull markets.
Then, within days, trillions of dollars of wealth were erased, coming close to matching losses in the 2008/2009 crisis, which took place over six months.
Actual impacts of the pandemic aside, the recent plunge in prices, and ensuing wild up and down swings this past week are illustrative of an overvalued market. And fear appears to have the upper hand over greed.
Certainly fear of the disease’s impact extends beyond investments and the global economy.
It could soon become a household economic challenge, too.
Bonds key during risky times
Already a smack in the face, COVID-19’s effects on our finances represent a teachable moment — a painful one — regarding the importance of financial planning, particularly with respect to risk management.
COVID-19’s immediate impact on portfolios has likely inflicted the most stinging lesson so far.
If it hasn’t hurt much, then you’ve likely engaged in proper planning beforehand, says certified financial planner and portfolio manager Grant White with Endeavour Wealth Management, Industrial Alliance Securities Inc.
"If a coronavirus event is enough to shake your plan for retirement, then I would argue the plan was not successfully created in the first place," says the Winnipeg-based adviser.
That’s not to say a financial plan must include pandemic planning. Rather it should have measures to manage risk in general.
Chief among those measures should have been de-risking the portfolio over the last two years as the stock market bubble really began to feel over-inflated.
(By the way, trying to de-risk your portfolio now — in the midst of panic — is often a bad idea.)
White further notes the crisis reinforces the need for fixed income (bonds) in your portfolio even though their returns are paltry.
"We’d get a lot of questions from clients about why they need to hold fixed income in their portfolio because they haven’t done anything," he says.
"Well in times like these, fixed income… are your best friend."
Uncertainty driving markets
Yet even the increase in your existing bond holdings’ value likely aren’t sufficient to absorb the full impact of this ongoing issue.
As well, central bankers’ tools — lowering rates and flooding markets with money — are not well adapted to a disease that can stop cold entire nations from going about regular life.
Indeed the interest rate significant cuts so far by the Bank of Canada and Federal Reserve seem to have only momentarily stemmed market fears.
If anything is certain now it’s that uncertainty about COVID-19’s impact is driving the markets, and it has a rather fearful hue.
That’s hard to manage with rate cuts alone, particularly given COVID-19’s impact is likely unprecedented, says Nathan Janzen, senior economist with RBC Economics Research.
The best comparison is the outbreak of SARS (severe acute respiratory syndrome) in 2003.
"At the time, the Bank of Canada estimated it subtracted about half a per cent from the 2003 quarterly GDP growth rate," he says.
But that was largely due to the impact on U.S. tourism to Ontario after the World Health Organization (WHO) issued a travel advisory for Toronto.
This disease — while not as deadly as SARS — is more easily transmitted and consequently more widespread, propagating quickly in places like Iran and Italy. Within days, COVID-19 effectively shut down Italy’s centre of commerce, possibly pushing the already economically challenged nation into another recession.
The effect on China — also deeply affected by SARS 17 years ago — is even more impactful this time, Janzen says.
"China is more than twice as big now as a share of the global economy as it was in 2003," he says. "If you have a shutdown in the Chinese economy, which we’ve had, there is the risk global supply chains are disrupted."
Slow economic growth could turn negative
Look no further than the chill on commodities — plummeting oil prices — due to falling demand from the world’s second largest economy.
If economic conditions slow even more from the virus, Janzen notes Canada’s relatively slow economic growth could also turn negative. Whether its effect leads to two consecutive quarters (six months) of gross domestic product (GDP) contraction — an actual recession — remains to be seen.
Janzen does, however, point to a recent silver lining: The number of infections in China is reportedly slowing. The trouble is the virus is now spreading rapidly elsewhere.
"So you could imagine China-style disruptions to activity anywhere there is a significant outbreak," he adds.
Indeed, the idea of being off work for prolonged periods — due to closure or quarantine — doesn’t seem so otherworldly anymore.
Again folks with a proper financial plan — one that sets aside enough in savings to cover three to six months of expenses — are more than prepared, White says.
"Given how many Canadians are living paycheque to paycheque, it’s likely a lot of people don’t."
And with spring break coming up, travel plans are also at risk, especially to places with travel advisories (a growing concern).
"Check for new and unexpected travel advisories from Global Affairs Canada," says Kaitlynn Furse, spokesperson for CAA Club Group.
Travel insurance may cover the loss of non-refundable expenses so long as it was purchased prior to the advisory being issued, she adds.
The best advice if you’ve got vacation plans is to call your insurer and explicitly ask about coronavirus risk regarding trip cancelation and medical coverage.
The same goes for life, disability and critical illness, says Lorne Marr, director of new business at LSM Insurance, who recently blogged about the impact on the industry.
"If you’re unsure about something, ask your insurer and get your response in writing."
After all, in times like these, it’s better to err on the side of caution.