Market volatility and the coronavirus (April 14 update)

14 April 2020 by National Bank Investments
A view from our experts

V for Victory? After plunging into bear market territory in record time (down 34% from February 19 to March 23) the last three weeks saw U.S. equities recoup roughly half of their losses. This spectacular rally was comparable only to the rebound that marked the end of the financial crisis in March 2009.

Undoubtedly, the key factor behind this V-shaped stock market recovery is renewed investor optimism following a succession of unprecedented monetary and fiscal announcements, combined with a deceleration in the spread of the virus. Accordingly, our sentiment indicator exited extreme pessimism levels on April 10 (Chart 3). Question: Is it premature for markets to anticipate an imminent victory in the war against COVID-19?

List of key considerations

To determine whether the worst is behind us, for a second time we are revisiting our list of key elements that were introduced on March 18, specifically:

  1. Concrete fiscal measures to help workers and businesses. The 2 trillion USD budget plan – including direct transfers and loans to struggling workers and businesses – is the most ambitious ever proposed in U.S. history. Comparable measures can be found in most developed countries, including Canada.
  2. A slowdown in the growth rate of new cases of COVID-19 worldwide. The number of new cases is plateauing in the Eurozone suggesting that the worst is probably behind them. Several encouraging signs are also emerging in the United States where the stability of the number of people testing positive relative to the number of tests administered over the past two weeks indicates the situation is increasingly coming under control. Italy's experience also points to sustained improvement in the coming days. Overall, although the epidemic is obviously not over and the risk of a second wave remains, the growth rate of new cases of COVID-19 worldwide is undeniably slowing.
  3. Clearer crude oil supply-and-demand fundamentals. The agreement between the OPEC+ and G20 countries announced over the weekend marks the end of the "price war" and thus, in part, clarifies the fundamentals of oil. However, the uncertainty surrounding the ability/willingness of some countries to meet their commitments, the size of the demand deficit, and limited inventory capacity all suggest that short-term price pressures will remain. In fact, WTI prices remain near their troughs despite recent announcements.
  4. The flow of credit to be restored to households and businesses. The series of extraordinary measures announced by the Federal Reserve and recently upgraded to include lower-rated  fixed income securities is a testimony to the central bank whatever-it-takes pledge. Credit and liquidity risk gauges, although naturally higher than in normal times, have consequently eased in recent days.
  5. The stock market to consolidate around current levels. Overall, most stock market indices are showing some signs of consolidation. But, the approach of certain moving averages (ma) is an important test for what comes next particularly for the VIX that is sitting on its 50-day ma, and S&P 500 that is likely to get there soon.

The bottom line

The war against COVID-19 is obviously not over as only the development of a vaccine (unlikely this year) would allow the world to claim victory. However, none of the five key items in our list is flashing red, suggesting that the worst of this historic crisis is behind us. Now, does that mean it's time to increase portfolio risk by shifting their allocations towards equity markets?

Over a longer-term horizon (> 12 months), we continue to believe that the outlook for equities compares favourably to safer bonds. This is what we argued on March 18 when we concluded the current situation represented more of an opportunity than a threat. This is all the more true, now that we have moved away from more dire scenarios. Besides, the equity risk premium remains close to an eight-year high.

In the shorter term (horizon of < 3 months), we continue to lean toward the side of caution. The magnitude and speed will have to pass the test of the upcoming earnings season which should focus, as requested by the Securities and Exchange Commission (SEC), on the current and potential pandemic impact. This may undermine the stock market's apparent hopes for a sharp economic recovery and thus create a better tactical entry point. To be continued.


Legal notes

The present document was prepared by National Bank Investments Inc. (NBI), a wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX).

The information and the data supplied in the present document, including those supplied by third parties, are considered accurate at the time of their publishing and were obtained from sources which we considered reliable. We reserve the right to modify them without advance notice. This information and data are supplied as informative content only. No representation or guarantee, explicit or implicit, is made as for the exactness, the quality and the complete character of this information and these data. The opinions expressed are not to be construed as solicitation or offer to buy or sell shares mentioned herein and should not be considered as recommendations. The opinions are not intended as investment advice nor are they provided to promote any particular investments and should in no way form the basis for your investment decisions. National Bank Investments Inc. has taken the necessary measures to ensure the quality and accuracy of the information contained herein at the time of publication. It does not, however, guarantee that the information is accurate or complete, and this communication creates no legal or contractual obligation on the part of National Bank Investments Inc.

NBI or its affiliates often act as financial advisor, agent or underwriter for certain issuers mentioned herein and may receive remuneration for its services. As well NBI and its affiliates and/or their officers, directors, representatives, associates, may have a position in the securities mentioned herein and may make purchases and/or sales of these securities from time to time in the open market or otherwise.

This document is for distribution only under such circumstances in Canada and to residents of Canada as may be permitted by applicable law. This document is not directed at you if NBI or any affiliate distributing this document is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that NBI is permitted to provide this document to you under relevant legislation and regulations.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments (the “Funds”). Please read the prospectus of the Funds before investing. The Funds’ securities are not insured by the Canada Deposit Insurance Corporation or by any other government deposit insurer. The Funds are not guaranteed, their values change frequently and past performance may not be repeated.

© 2020 National Bank Investments Inc. All rights reserved. Any reproduction, in whole or in part, is strictly prohibited without the prior written consent of National Bank Investments Inc.

® NATIONAL BANK INVESTMENTS is a registered trademark of National Bank of Canada, used under license by National Bank Investments Inc.


Investor Education

Get informed with investor education content.


Learn more