By Scotia Wealth Management - The Zukiwsky Group

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MARKET WATCH – Mar. 27, 2020

Mar 27, 2020 | 11:45 AM

Big Picture

Massive Stimulus Packages Help Stabilize Markets; Dow Enters New Bull Market

It’s been yet another historic week for global financial markets, which continue to experience extreme volatility in the face of a global pandemic.

On Monday, U.S. stocks dropped in another wild session as the House and Senate failed for a second day to pass a rescue package to ease the impact from the coronavirus. While Senate Democrats and Republicans remained at an impasse over a proposed stimulus bill, the U.S. Federal Reserve continued its bold action, by extending loans and purchasing hundreds of billions of dollars in government debt. By Monday’s close, the Dow was down nearly 600 points, while the TSX surrendered 623 points—more than 5 per cent as the energy sector continued to struggle.

In a miraculous turnaround Tuesday, the Dow surged more than 11 per cent, its biggest one-day gain since 1933, on news that Congress was finalizing a deal on a $1.6-trillion stimulus package (although the final numbers remain unclear). In Canada, the TSX staged an epic rally as well, rebounding from an eight-year low the day before. By Tuesday’s close, the TSX was up more than 1,300 points, while the Dow recovered more than 2,100 points.

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News of the U.S. stimulus bill helped fuel upward moves in markets around the globe. German stocks surged 11 per cent, and U.K. blue chips climbed nearly 10 per cent–their best sessions since the global financial crisis in 2008. Meanwhile, South Korea’s market was up nearly 9 per cent after the government announced its own rescue package of $80 billion.

In Canada, the TSX climbed more than 500 points on Wednesday after Parliament approved an $82-billion aid package–including $27 billion to help people and businesses deal with the pandemic and an additional $55-billion in tax deferrals. In the U.S., it was a frantic day of trading once again as the Dow and S&P notched their first back-to-back gains since February, while the Nasdaq was down slightly. Although the Dow ended in the green, it was another day of wild swings, with much of the day’s gains surrendered in the final 15 minutes of trading.

U.S. stocks continued their climb Thursday–even after data revealed a record 3.28 million new jobless claims filed for the week ending March 21. Many investors continue to remain hopeful that a $2-trillion stimulus package can help save the country’s faltering economy. By Thursday’s close, the Dow was up more than 6 per cent, remarkably entering a new bull market. While all three U.S. markets were up significantly, the TSX struggled to keep pace, as Brent crude dropped 2.7 per cent. Nevertheless, Canada’s main index finished the day with a gain of 232 points.

N.A. Markets Bounce Back

For the four days covered in this report, the Dow recovered 3,378 points to close at 25,552. The S&P 500 climbed 325 points to settle at 2,630, while the tech-heavy Nasdaq added 919 points to close at 7,798. In Canada, the TSX surged 1,519 points to end at 13,371.

Strategy

Measures of market volatility mark new highs amidst turbulent trading.

The CBOE Volatility Index (VIX) lurched to new highs last week as North American equities swung as much as 12 per cent in either direction as investors struggle to handicap the impact of COVID-19 on earnings. Long-term equity market returns have tended to track closely with corporate profitability, and recent price movements suggest market participants are discounting extreme impairment scenarios.

Indeed, the long-term value ascribed to a business should not decline by 30 per cent, as we have seen, if profits decline for one, or even two years. Implicit in that assumption is our view that the pandemic will not have a material impact on long-term growth. As such, we believe that the sell-off in equities justifies gradually rebalancing to a neutral weighting in balanced portfolios.

Further, given the material stimulus and corporate welfare that central banks and governments are introducing to combat the virus-induced slowdown, our long-term return expectations for equities, and other battered asset classes, have been steadily improving. In our view, there is likely more downside in equity markets but the recent pull-back has returned asset prices to relatively more attractive technical entry points.

Disclaimer

This report is provided to you for informational purposes only and is not intended to provide personal investment advice. This report does not include or constitute an investment recommendation and does not take into account the particular investment objectives, financial conditions, or specific needs of individual clients. Any statements regarding future prospects may not be realized. Before acting on this material, you should consider whether it is suitable for your particular circumstances and talk to your investment advisor.

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