Making Sense Of Market Volatility

Much like the infographic to the left, showing what success looks like, long term investing doesn't always go in a straight line and increases over time, albeit it can feel like a roller coaster ride much like the feelings many of us are going through today with COVID-19.  The "roller coaster" investment feelings that we are experiencing are from extreme market volatility where the price of a stock or bond goes up and down based on supply and demand from investors. Volatility measures how much a security moves, and these moves have been significant lately. There are many ways to measure and define success, and we know for certain it takes discipline, perseverance, having concrete goals, and sticking to a plan to achieve success: much like it does for successful investment outcomes.  

Why is this happening now?

Extremely market volatility occurs when something unexpected happens ie COVID 19  (aka Black Swan event), and it's impact creates uncertainty in the markets which leads to extreme price movements you are probably hearing about constantly in the news cycle. Though it can be nerve-wracking for investors, volatility is actually a normal part of investing and has both positives and negatives. On one hand, extreme market volatility like we are experiencing right now can lead investors to make short term investment decisions that are out of sync with their long term investment goals,  On the other hand, volatility can create potential opportunities for well seasoned investment professionals and strategies; many of which are taking care of your hard earning savings and investment dollars.

How should I respond?

Extreme market volatility and market downturns are inevitable (it has been 11 years since our last significant drop so we tend to forget), but markets have bounced back from past crisis in the past.  See infographic below. 

Remember you're invested for the long term: resist the temptation to invest on how you are feeling in the moment and focus on your long term goals. Stay the course:  try avoid making any immediate investment decisions that aren't already part of your financial plans.

What were the market developments last week?

  • Canadian and U.S. markets moved steadily higher throughout the week, perhaps demonstrating investor confidence that the recovery from the COVID-19 outbreak could be swift.

  • The Canadian economy lost 1.01 million jobs in March, while the U.S. announced weekly jobless claims of 6.6 million. The U.S. Federal Reserve announced an additional $2.3 trillion in aid, timed to coincide with the release of the jobs number.

  • Saudi Arabia and Russia were expected to agree to cut oil output after American oil production began falling. Regardless, the price of oil continued to decline, as many expected these measures would not make enough of a dent in the current supply glut.

  • The number of confirmed COVID-19 cases worldwide surpassed 1.5 million, a 50% increase week over week. While social distancing and lock down measures remained active in much of the world, China ended its lock down of the city of Wuhan, where the virus first emerged.

I continue to stand by the advice I have been sharing since this downturn began – your long-term investment plan was built on solid footing and to be able to overcome market shocks such as the one brought about by COVID-19.  Some of the most turbulent markets in history have bounced back significantly in short order, with those able to withstand the emotions of such declines reaping the rewards. This is not to say that we know exactly how this specific event will play out, but it does bring some comfort knowing that markets have been here before, showing impressive strength in the years that followed.

The table above demonstrates this ability to recover from large declines over periods of one, three and five years, with examples from 1930 to 2008. Perhaps most impressive is the average result when all of these moves are combined, which skews overwhelmingly positive.

Understand the CERB Plan

As a result economic impacts from COVID-19 outbreak, the Government of Canada has been implementing measures to help ALL Canadians navigate potential hardships.  I will do my best to offer summary pieces I find, and if you have any questions relevant to your situation I will do my best to help. Click here for good reference piece on unemployment options and RRIF measures.

What Shape will the recovery look like

A fascinating look at a V, U, and L shaped recoveries from three countries since the 2008 Global Financial Crisis. Using Canada, (V), the United States (U), and Greece, (L), this Harvard Business Review article clearly describes and visualizes what these types of recoveries look like using the real-world results since 2008.

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