The coronavirus has had a visceral impact on our day-to-day lives. As a result, it may be difficult to separate the personal fears associated with COVID-19 from the financial fears associated with falling markets. So we thought it would be a good time to do a market check-up to see where things actually stand.
Let’s start with a quick look across major asset classes. The following chart shows first-quarter returns. Almost nothing was spared. Major equity indices were down over 20%, while the energy sector was especially hard-hit, owing to the collapse in oil prices.
The selloff has also been incredibly swift by historical standards. The next chart shows that the most recent bear market was reached in the shortest time ever. Not even the great depression, nor the dot-com bubble, nor the financial crisis realized a bear market as quickly as what we just lived through.
The next chart does a good job of putting into perspective why the markets are so spooked about the coronavirus. It shows the U.S. unemployment rate going back to 1900. That big spike at the end is J.P. Morgan’s estimate for 20% unemployment starting in May. If realized, this would represent the highest level of unemployment since the great depression.
Back home in Canada, employment has also begun to fall off a cliff. On Friday of last week it was reported that one million jobs were lost in March. The next chart puts this swift decline in perspective. Since widespread social distancing measures and forced closures didn’t take effect until the middle of March, April (with its full-month of job losses) is shaping up to be much worse. The federal government has reported that 5.4 million people, or 30% of the labour force, are now receiving emergency financial aid. This means an additional drop of five million people could be added to the graph below once the April numbers are reported.
The big questions now are: how long do these layoffs last? How long does the economy take to recover? And when will a prolonged equity market rally take hold? To phrase all this in today’s financial jargon, will it be a quick, V-shaped recovery or a long, U-shaped one? You can see what J.P. Morgan is forecasting in their unemployment chart above: it has the U.S. unemployment rate making a V-shaped recovery to sub-5% by the end of 2021. While the end of 2021 may seem like a long-way off right now, you can see that a snap-back recovery in jobs like that would be unprecedented.
From our point of view, we aren’t predicting whether the recovery is a V-shape or a U-shape. Short-term thinking isn’t our forte. Instead, we are focusing on what the economy will look like after the recession is over. As we progress through this current period of economic uncertainty, we will be diligently assessing the evolving political and financial landscape to best position ourselves for a more prosperous future.