States and provinces across North America continue to loosen quarantine restrictions, and in some cases, re-open completely, albeit with social distancing recommendations still being encouraged. While there have been some issues in certain states, notably in Wisconsin where a spike occurred two weeks after re-opening, we have seen some success in managing this virus while still re-opening our economies (source: forbes.com – Nicholas Reimann: Wisconsin Sees Coronavirus Spike 2 Weeks After Abrupt Reopening).
For example, on Monday of this week, Ontario, where there has been a more measured re-opening, reported the lowest number of new cases since the end of March (source: cp24.com – Codi Ford: Ontario reports lowest number of new COVID-19 cases in nearly two months). The general re-opening of the economy, as well as certain other factors, such as the fact that jobless claims in the US have begun to reduce (source: Bloomberg: Katia Dmitrieva – Americans on Jobless Benefits Post First Drop of Pandemic) and the fact that corporate earnings were not as bad as anticipated (source: yahoo.com – Myles Udland – ‘Not worse’ is a long way from ‘good’: Morning Brief) helped to continue the market rally throughout the first half of this week.
However, on Thursday of this week, President Trump announced that he would be holding a news conference on China the following day. Concerns over a potential trade war or sanctions caused a downturn in the three North America indices we have been studying, with all three closing in the negative on Thursday and the TSX and DOW JONES closing negative on Friday (source: marketwatch.com: Mark DeCambre – Dow takes a 360-point U-turn to end lower Thursday as Trump says he will hold a Friday news conference on China).
The daily returns this week can be found here (please note that the S&P 500 and DOW JONES were closed on Monday for Memorial Day).
The weekly returns are found here:
| Market Index | Returns Week of May 25th |
|---|---|
| TSX | 1.87% |
| S&P 500 | 3.01% |
| Dow Jones | 3.75% |
Source: Yahoo Finance
As always, these returns need to be taken in context. While we have seen a generally positive market recovery since the current low seen on March 23rd, analysts still consider the market to be in turmoil, with the VIX closing at 27.51, well above the 20-point threshold. Additionally, many analysts consider the market to be overvalued, with the returns seen as being stimulus driven, as opposed to traditional economic growth. With this in mind, looking at other market crashes and their subsequent recovery can help give insight into the recovery we are currently experiencing.
Looking at previous market crashes, the length of the reduction, and the subsequent recovery, yields interesting results.
These can be found here:
Source: trefis.com: Market Crashes Compared: Coronavirus Crash vs. 4 Historic Market Crashes
This chart shows that in most cases, the recovery tends to be substantially longer than the crash that preceded it, with 2000 being the exception. This can be partly explained due to the Iraq war which occurred after the 9/11 terrorist attacks, and the economic growth that this promoted (source: marketwatch.com – Mark Hulbert: The real investment lesson of the Iraq war). With the exception of this outlier, the recovery tends to take much longer than the crash. As such, despite recent returns and market performance, investors should be wary as history shows we are not out of the woods quite yet and that what we are currently experiencing may not be a true recovery, but instead inflated returns due to the various stimulus packages that governments have promoted.
Please let me know if you would like to have a discussion on how your investments have handled this market environment, as well as how well they are designed to handle the volatility that is projected to remain for the coming months.
