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Stay the course, this storm will pass

Richard Morin

Update :
23
March
2020
Update :
March 23, 2020

Your portfolio is like an ocean liner sailing through the financial markets. After a long period of good weather, it is suddenly caught in a storm of rare intensity. The captain gives his instructions: stay calm, no one is in danger. We stay inside and wait for the storm to pass, as they always do.

No one should think about leaving their cruise ship in the middle of a storm. The same is true for your portfolio, and the past week is a perfect example. The storm in the financial markets reached a peak of intensity on Wednesday, March 18. Stocks and bonds fell in tandem as investors sold indiscriminately to take refuge in cash, GICs and bank deposits.

We stay the course

We have already explained the importance of staying disciplined and not selling your stocks when the market is down. The same logic applied to bonds last week. Fearing that governments would flood the market with bonds to finance historically large stimulus programs, investors sold them en masse, causing a significant drop in prices on the same day that the U.S. stock market fell 12%. The opposite is usually true: when the stock market falls, investors tend to take refuge in government bonds, causing their price to rise.

The structure of the bond market has also exacerbated the problem. Unlike stocks, which are traded in centralized markets where bid prices (the price investors are willing to pay), ask prices (where they are willing to sell) and the price of recent trades are posted continuously, the bond market is fragmented, opaque and often lacks liquidity, especially for corporate bonds. As a result, it was very difficult to determine the exact value of bonds in the last few days, which had an impact on the price of bond funds - mutual funds and exchange-traded funds - which no longer reflected the real value of the securities they hold. The situation partially recovered by the end of the week as central banks announced support measures and bond prices recovered.

In such an environment, the only prudent thing to do is not to trade your bonds or bond funds, as you do with stocks

When do we arrive?

The market does not tolerate uncertainty. When in doubt, it tends to anticipate the worst. This is what is happening right now as no one can predict the duration or magnitude of the economic downturn that the pandemic will cause. At this point, we cannot rule out the possibility of a recession of a magnitude that none of us have experienced before. However, even in such a scenario, the balanced portfolio would still be the best way to preserve and grow capital over the long term.

Fortunately, the stock market also tends to anticipate exits from crises and recessions. If the past is any guide, it will begin its rally before the good news hits the headlines. The only clues will be some "not so bad" news that is just beginning to emerge. Disciplined investors who have stayed in the safety of their ships will just have to be patient to get to port.

Follow the instructions, stay home and don't hesitate to contact your Archer consultant!