Caution: More Volatility Ahead

by Kevin McCreadie, AGF Management Ltd.

Seven straight days of losses wiping out trillions of U.S. dollars in stock market value. The biggest one-day point gain ever for the Dow Jones Industrial Average. The first emergency rate cut by the U.S. Federal Reserve since the nadir of the financial crisis more than 10 years ago. Another string of heavy losses, fail-safe circuit breakers and a trading halt.

It’s a stressful time to be an investor these days. And as harrowing as the past two weeks have been, equity markets are bound to remain volatile if the coronavirus continues to spread and increases the threat of a global recession.

But volatility is not calamity, nor is it enough of a reason to cut your losses and run for cover. While the circumstances driving stocks lower this time around may be different than in prior instances—and harder to grasp as a result—there’s every chance that the current market correction will end in the same way that others have before it: With a rebound in prices that eventually leads to market gains and new all-time highs.

That doesn’t mean investors shouldn’t be worried. The virus has become a serious global health risk and is clearly compromising the strength of the global economy. In fact, several of the world’s largest multinational companies have already warned about its impact on future earnings and supply chain disruptions seem inevitable in the weeks ahead.

Further complicating matters is the beginning of global oil-price war that resulted in the biggest drop in crude prices since 1991 on Monday after Saudi Arabia’s surprise price cuts kicked off a production war with Russia.

Still, other factors are at play that may help stem the current tide over time.

This includes the quick response of the U.S. Federal Reserve and several other central banks to the outbreak. While the Fed’s 50-basis point emergency rate cut hasn’t stopped stock prices from falling just yet, it’s a positive step in keeping the economy on solid footing and should be a sign to investors that additional monetary measures are likely in the case that economic activity continues to worsen.

Some form of fiscal stimulus, meanwhile, may also be in the cards after the G7 finance ministers and central bankers raised the possibility in a recent statement, saying they “are ready to take actions, including fiscal measures where appropriate.”

Beyond these efforts to offset the economic impact of the virus, it’s also important to remember that not all asset classes are suffering.

Government bonds have rallied hard in recent weeks with the long end of the yield curve providing double-digit gains year-to-date. Other safe havens like gold have also performed well and many liquid alternatives that use long/short strategies have done the same.

In other words, caution, not panic, should be every investor’s mindset going forward. While it’s likely weeks before the full economic impact of the coronavirus is better understood, there is good reason to believe a deep recession can be avoided and that market losses can be mitigated by a broadly-diversified portfolio that includes stocks, bonds and alternative asset classes and strategies.

That diversification is critical to every investor should go without saying. But in volatile times like these, it’s always worth repeating.

Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.

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The commentaries contained herein are provided as a general source of information based on information available as of March 7, 2020 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.

The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies.

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About AGF Management Limited

Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.

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This post was first published at the AGF Perspectives Blog.