Why the stock market is bouncing back and what amateur investors should know
TORONTO -- It's been an interesting year to be an investor.
On Feb. 20, the S&P/TSX composite index hit an all-time closing high of 17,944.06. Half a week later, as it became clear that the novel coronavirus was not an isolated concern, the mass sell-off was underway. By late March, more than one-third of the value of Canada's main stock index was gone.
Since then, though, the market has rallied. As of the close of trading Tuesday, nearly two-thirds of the losses from the early days of the pandemic had been regained. In the U.S., the recovery of the Dow Jones Industrial Average has been even greater.
All of this may raise an obvious question for amateur investors: why is this happening?
Why is a stock market plunge that was precipitated by the emergence of COVID-19 reversing itself even though the virus remains an active concern? Why, in a week when the head of the World Health Organization said this week that 'the pandemic is still accelerating,' are markets still rising? And why is the stock market in the U.S., where the number of new COVID-19 diagnoses just hit a two-month high, recovering more quickly than the one in Canada, where the virus situation is improving?
CTVNews.ca asked Pattie Lovett-Reid, CTV News' Chief Financial Commentator, to weigh in on these topics and others that might matter to amateur investors struggling to understand the connection between the pandemic and the market.
The following interview has been lightly edited for clarity.
Why did the stock market sink so much at the beginning of the pandemic?
PLR:There was just a complete fear of the unknown. In the past, we've had economic slowdowns – but we've never had a full halt where people couldn't do anything. Money may have stopped in the past, but people did not. This was completely new. This rocked the foundation of many. Markets are very forward-thinking and forward-looking, and we couldn't see where this was going.
Does that also help explain why we're seeing the market recover now, even though the coronavirus is still a problem?
PLR: Markets don't care about a pandemic. They don't, sadly, care about social injustice. They don't necessarily care if they personally disagree with government policy. Investors care about making money.
Someone who is attempting to time the market is someone who is looking to benefit now from economies reopening, people working from home. Think about the stay-home economy. Look at tech stocks that defy odds – they have hit record highs, they have strong cash on their books. If you think about it, we've had a strong reliance on technology – so some of the winners, early still in this pandemic, clearly make sense if you're an investor.
Given that, why are the American markets rebounding a little faster or a little higher than the Canadian ones at this point?
PLR: It comes down to some of the sectors that are doing better. We don't have as strong a presence in technology as the U.S. markets do. There certainly have been … leading indicators that things hopefully will start to turn around – corporate profits, that sort of thing.
You think about the energy sector, when oil literally cratered and we're seeing some bounceback – it still hovers around $40. But our concentration on the TSX, it really continues to be financials as well as energy, and those are two of the hardest-hit areas.
What's the message for anyone who's concerned about their finances during the pandemic? It sounds almost like you're saying the pandemic doesn't matter.
PLR: I think it does. The markets are going to be very volatile. Markets do not like uncertainty, that's for sure, and we certainly have uncertainty. I think as an investor, you have to look at your personal tolerance for risk and your time horizon, as well as the quality of your portfolio.
I get a lot of questions from seniors who say 'Should I be moving entirely into cash?' And my response to them is no, not necessarily. What I think you should look at is 'Do you have enough money to cover off your living expenses?' You may be in your 60s, but you could still have a long time horizon, so you could want to have exposure to the markets to keep up with taxes and inflation.
If you're someone else who literally cannot sleep at night – and there are people who have reached out to me in that situation – then they probably had more risk than they should have, or more exposure in certain areas than their portfolio warranted, and they felt they needed to sell – and that's OK too, because sleep factor matters.
It depends on the individual. I'm in the markets, I talk about the markets, and I've been concerned about the markets – and so what I will do, my husband and I, is sit down and look at our composition. We're reasonable about our return expectations, and we talk regularly about whether or not we need to tweak it. I can tell you for now it's steady as she goes. I think boring is beautiful. I want a boring portfolio that continues to give me the type of returns that I need over time. But each person needs to assess that for themselves
Is there anything else that you think amateur investors should know right now?
PLR: Don't let your emotions dictate your decisions. There are so many pieces of headline news – and I contribute to those headlines – but that doesn't mean you need to react to all of them.
You have to sort of look at your own assessment, don't go with the herd mentality, and know that we have been there before, in these types of situations where markets have been extremely volatile. It never feels good in the moment, ever.