Stuck with near-term uncertainty and volatility

After an epic Q1 drop driven by COVID-19 fear, asset prices reflect a deep global economic and earnings downturn.
April 2020

Courage is resistance to fear, mastery of fear, not absence of fear

Mark Twain

After an epic Q1 drop driven by COVID-19 fear, asset prices reflect a deep global economic and earnings downturn. The late March rebound helped limit the carnage, but we’ll need more than the already massive fiscal and monetary bazookas to decidedly turn investor sentiment and fuel a sustained rally. We must see the light at the end of the C-19 and economic tunnel.

While it seems we will be in lockdown mode until at least May and the spreading of the virus has not yet peaked, asset prices are trading above their March lows. Even the 2 most recent weekly U.S. Initial Jobless Claims numbers (Chart 1) that blew economist expectations did not spook investors. We take that as evidence that the ongoing economic debacle is largely reflected in stock prices.

Chart 1: U.S. Jobless Claims (thousands) Explode on Economic Shutdown

Chart 1: U.S. Jobless Claims (thousands) Explode on Economic Shutdown

Source: Bloomberg, BMO GAM

Central-Bank QE Making Fixed Income Great Again

The social-distancing cure against COVID comes with a massive economic cost and governments will turn to bond markets to finance the stimulus plans while tax revenues collapse. Such incremental bond issuance would normally push yields higher, as they did in mid-March (Chart 2), but we think central-bank buying will help keep 10-year yields trending lower this year, which will benefit fixed-income heavy and balanced solutions.

Chart 2: Yield on 10-Year Government Bonds Racing to Zero

 Stuck with near-term uncertainty and volatility - Chart 2 Yield on 10-Year Government Bonds Racing to Zero

Source: Bloomberg, BMO GAM

Oil Prices: Enough Pain for Putin and MBS?

A POTUS tweet giving hope for OPEC+ oil production cuts sparked a +20% surge in oil prices, but even cuts of 10-15 million barrels per day would leave the world massively oversupplied with oil as the COVID-induced demand destruction is probably closer to 30 million barrels per day. Like most asset prices, oil and energy companies look cheap, but with global oil-storage capacity to be full within a couple months, the energy complex could continue lagging the broad market even as economic activity resumes this summer.

Loonie to Continue Flying Low

Currencies have repriced with a bang since global markets are plagued by COVID. Because we held a bearish view on the loonie prior to COVID, our foreign currency exposures were unhedged, which helped cushion the equity selloff. At $0.70 or lower, it might be tempting to start hedging against a rebound of the loonie, but since we think the extremely weak oil prices will persist beyond COVID, it’s safer to leave foreign-currency exposures unhedged a few more months. Our long-term view, however, is that the loonie should appreciate back to the mid-70s.

Steering During the Storm

This is not a time to sell equities or make bold moves and rush to buy stocks convinced the market bottom is behind. The recovery process will be slower than the fall, but both the economy and stocks will resume their upward trend. Maybe not next week, but later this year.

For investors with cash to put to work, deep equity dips as we just experienced are rare, great opportunities to progressively buy into stocks and average-in into the market. This is our own game plan for our managed solutions. This is a transitory storm, the tailwind exiting this health crisis will be substantial.


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This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

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