It has now been more than six months since the World Health Organization declared the global COVID-19 pandemic, upending our home and working lives. As the initial wave of infections subsided and the virus’s spread stabilized through the summer months in most parts of Canada, we adapted to the “new normal.” Heading into the fall, infection rates in some provinces are rising again, raising the possibility of further restrictions to limit the virus’s spread. Amidst the ongoing uncertainty, I hope that you and your family are keeping well.
Capital markets in the third quarter
Recovering from the pandemic-related downdraft of the first quarter, financial markets had enjoyed a period of relative calm and optimism throughout the summer of 2020. Equity prices in many markets continued to improve, with some sectors moving sharply higher as lockdown restrictions eased, and economic activity gradually resumed. Toward the end of the third quarter, however, investor concerns resurfaced. Markets were rattled by growth in the numbers of COVID-19 infections, uncertainty related to the upcoming U.S. presidential election, and the expected economic stress due to the reductions in government supports for businesses and individuals.
Most global equity markets started the quarter positively, led largely by investor optimism for sectors expected to benefit from current conditions, such as technology and health care. The S&P 500 Index, a broad representation of the U.S. equity market, reached an all-time high in early September before volatility resurfaced as the quarter drew to a close. The U.S. index finished the three-month period up 6.6% for the quarter and 8.4% for the year-to-date in Canadian dollar terms. The MSCI World Index, which reflects returns for developed equity markets around the globe, followed a similar path and was up 5.7% for the quarter and 4.9% for the year-to-date.
In Canada, the S&P/TSX Composite Index also trended higher through much of the summer, buoyed by sectors such as materials (precious metals), industrials (transportation companies) and consumer staples. Despite continued weakness in the energy sector and broader market volatility later in the quarter, the Canadian benchmark finished the three-month period with a gain of 4.7% but remained down 3.1% for the year-to-date.
Central banks around the world continued to gauge the ongoing economic impact of the pandemic in setting monetary policy. The U.S. Federal Reserve, for example, noted that the U.S. economy had picked up considerably, but much depends on the confidence of consumers to spend. The central bank indicated that it would allow inflation to exceed 2% as the economy recovers and that its target interest rate would be left unchanged at 0-0.25% for “an extended period.” The Bank of Canada also kept its benchmark interest rate steady during the third quarter at 0.25% and said it would continue its large-scale government bond purchase program designed to promote liquidity in the financial system. The decline in interest rates has supported bond prices over the past several quarters, resulting in the FTSE Canada Universe Bond Index, a broad measure of the Canadian government and corporate bonds, to return 0.4% for the quarter and 8% for the year-to-date.
What can we expect now?
So far, 2020 has reminded us of several important lessons, one of which is that timing the market is nearly impossible. Many people would have sold their investments shortly after the U.S. market declined nearly 34% in March, believing that a recovery would be a long way off. But from its lowest point on March 23, the S&P 500 took just 140 days to recover – the fastest rebound on record. Those who stayed invested would likely have been rewarded for their patience, while those who sold would have locked in losses.
Looking ahead, the COVID-19 pandemic is far from over and will likely have an impact on investment markets for months to come. Even though the economic outlook remains cloudy, particularly if further restrictions to limit the virus’s spread become necessary, governments and central banks continue to provide support for the economy through accommodative fiscal and monetary policies.
For this reason alone, keeping a long-term view will be especially important.