Dave Donabedian, CFA
March 09, 2020
Concern over the economic and financial impact of the coronavirus turned to outright fear over the weekend. As a result, stock prices declined at the market open Monday morning. Here are key developments that led to this next leg down in equity markets.
We believe the U.S. economy entered this maelstrom in fundamentally good shape, and that the country should ultimately experience a strong recovery. However, the force of these new headwinds complicates our perception of when—and from what level—the recovery will begin. Economic data is likely to deteriorate in March and get progressively weaker in the second quarter. Alongside this trend, it is likely that corporate profit expectations will be downgraded as well.
In the days and weeks ahead, there are a few key areas that may determine the stock market’s path.
Some of the developments being treated as bad news could actually help the economy—eventually. The entire Treasury yield curve plunging below 1% is certainly a sign of market stress. But the low interest rates that will result should spark enticing financing rates for consumers on cars, houses, etc. Also, the panicked drop in the price of oil is expected to lead to a dramatic fall in gasoline prices and a boost to consumers’ discretionary incomes.
It has been a rough 2020 for equity investors, and it’s only March. The S&P 500 is down 14.7% year-to-date*.
For reasons mentioned earlier in this piece, the market environment could remain challenging in the weeks ahead. Ironically, today marks the 11th anniversary of the end of the last bear market. Therein lies an important reminder about investing in equities: Long-term historical returns of more than 10% per year come with an inherent trade-off of short-term risk. That is what we are experiencing now. The chart below puts the year-to-date correction in perspective:
In the midst of this volatility, our equity teams are looking for opportunities to acquire high-quality companies at newly reduced prices. Our goal is to take advantage of market emotion to upgrade the long-term growth potential of our portfolios. Meanwhile, the CIBC Private Wealth external manager platform emphasizes strategies with a demonstrated ability to outperform benchmarks during difficult market environments in order to mitigate capital drawdowns.
Our fixed income team’s emphasis on high credit quality has been effective at protecting capital during this turbulent environment. In fact, high-quality bond benchmark returns are positive year-to-date and since the stock market all-time high on February 19**.
Dave Donabedian is chief investment officer of CIBC Private Wealth Management, serving in that capacity since 2009. His responsibilities include chairing the Asset Allocation Committee, as well as providing oversight of internal investment strategies and the external manager selection platform.
* (source: Bloomberg, as of 03.09.2020)
** (source: Bloomberg, as of 03.06.2020; indices referenced are Bloomberg Barclays Aggregate Index and Bloomberg Barclays Short/Intermediate Muni).
CIBC Private Wealth Management includes CIBC National Trust Company (a limited-purpose national trust company), CIBC Delaware Trust Company (a Delaware limited-purpose trust company), CIBC Private Wealth Advisors, Inc. (a registered investment adviser)—all of which are wholly owned subsidiaries of CIBC Private Wealth Group, LLC—and the private wealth division of CIBC Bank USA. All of these entities are wholly owned subsidiaries of Canadian Imperial Bank of Commerce.
This document is intended for informational purposes only, and the material presented should not be construed as an offer or recommendation to buy or sell any security. Concepts expressed are current as of the date of this document only and may change without notice. Such concepts are the opinions of our investment professionals, many of whom are Chartered Financial Analyst® (CFA®) charterholders or CERTIFIED FINANCIAL PLANNER™ professionals. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S.
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