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As the COVID-19 Crisis Deepens

 

With financial markets continuing to slide and COVID-19 cases topping 350,000 worldwide, Brian Belski, Chief Investment Strategist at BMO Capital Markets, moderated a roundtable discussion with BMO experts to discuss the latest developments to the outbreak. Margaret Kerins, Head of FICC Macro Strategy at BMO Capital Markets and Michael Gregory, Deputy Chief Economist at BMO Capital Markets joined the call. Special guest Dr. John Whyte, Chief Medical Officer of WebMD, joined the call to discuss the week’s most recent medical developments.


Dr. Whyte opened the call by underscoring that the coming weeks will be critical to providing a better picture of where North America is in containing the COVID-19 outbreak, and whether the measures in place to track and contain the spread of the disease are the right ones or should be amended. Read more from Dr. Whyte on the coming weeks’ critical battle against COVID-19.


On March 16, U.S. President Donald Trump announced a 15-day period to slow the spread of disease, including social distancing, the cancellation of events, avoiding crowds of 10 to 25 people and practicing good hygiene.

“I think one of the biggest changes that we're going to see in another week or so, where we start to have more data about how we're doing in the mitigation strategy, is how we stratify risk so that we can address the overall challenges of social distancing,” said Dr. Whyte, who prior to WebMd served as the Director of Professional Affairs and Stakeholder Engagement at the Center for Drug Evaluation and Research at the USFDA.

While the numbers are changing daily, at the time of the call, there had been 351,731 cases of the virus reported globally, with 15,374 deaths. The US had reported 414 deaths due to the virus, from a total of 34,400 cases, and 60 percent of all cases were in the states of California, New York and Washington.

After Dr. Whyte gave a detailed explanation of the current spread of COVID-19 in the United States. Michael Gregory took over the call to share his thoughts on both the Canadian and U.S. economies.

Economic Changes

As more parts of the world employ pandemic mitigation strategies like social distancing, and in some cases shelter-in-place, the economic impact of the downturn has become worse than it was a week ago, said Gregory. He explained that the situation is changing so quickly that by the time analysts have collected and run the data to forecast, the numbers have already changed.

“We're likely to see a pretty hefty contraction in the economy for the month of March and that's going to pull the entire quarter into negative territory,” he said. “Our sense is the US will probably contract about two percent at an annual rate in Q1, and Canada about two and a half percent.”

The higher number in Canada is due to pre-existing headwinds in place, namely the rail disruptions and the collapse of oil prices, an extra burden on the Canadian dollar.

The second quarter, Gregory said, will see a contraction in the double digits, but there’s a lot of uncertainty around how bad things will get. Estimates over the weekend ranged from 20-25 percent, and all the way up to a 50 percent contraction of the economy.

Jobless Rates on the Rise

Last week in Canada, Prime Minister Justin Trudeau said there were 500,000 applications for employment insurance. Gregory estimated this would work out to a 2-2.5 percent increase in the jobless rate here in Canada. Comparatively, the United States saw 70,000 jobless claims last week, but he estimated it could be as high as 2-3 million by the end of this week, leading to a 1.5 -2.0 percent increase in the American jobless rate.

The Good News

Policymakers are responding quickly, which is good. The morning of the call, the Federal Reserve had taken further emergency measures, including open-ended quantitative easing, which Gregory said was an improvement from last week’s limits.

These measures, along with the Bank of Canada’s announcements, are meant to ensure that “credit markets continue to function and that the credit creation process continues to function, so it doesn't add to the downturn,” he said, “and sets the stage for a rebound sometime in the summer months.”

The bottom line, however, is that what we’ve seen so far isn’t enough, Gregory said. Expect more measures to be announced to minimize the downturn as much as possible, but it will still be severe.

What we do forecast, he continued, looking into the third quarter, is about 7 percent annualized growth on both sides of the border as the rebound occurs. The reason for this is that, due to the large contraction expected in the second quarter, we will essentially be starting back at zero in the third quarter, along with anticipated stimulus from the Federal Reserve, Gregory explained.

The final word is that the downturn, while temporary, will be painful.

Markets Not Functioning

Margaret Kerins noted that despite the wave of support from the Federal Reserve, markets are still not functioning in terms of the plumbing. She went on to explain that so many of the programs announced in recent days are only just beginning, or haven’t even started yet.

“While the news of support is extremely positive,” she said, "we need the programs to actually be implemented. In other words, we need the buying to actually begin.” The impact, she continued, would be determined by the length of the shock to earnings, which is still a big unknown.

What Kerins believes will get us out of this negative feedback loop is the strong fiscal response that’s in the process of launching right now. In addition, we need data around the spread of the virus in the United States and the efficacy of containment measures, as well as news of successful virus treatments and eventually a vaccine.

Fixed Income Macro Strategy

Kerins explained that much of the strategy is based on the playbook from 2008. “We know it's going to be different this time, but I think it gives us a good basis for what we may expect initially,” she said. The stimulus package is much bigger this time, however. She finished by saying the bottom line is that we expect extremely heavy issuance and massive amounts of buying out of the Federal Reserve.

Investment Strategy Perspective

Brian Belski wrapped up the call by reiterating points made by Gregory and Kerins. With the rapidity of news, data, emotions and volatility changing on a daily, if not hourly basis, he said forecasting is extremely difficult.

He reminded listeners that panic is not an investment strategy, longer term, and in the short term investors should focus on defense and capital preservation on the equities side.

He predicted that until we see a pattern of less negative headlines surrounding COVID-19, it would be very difficult to mount a significant recovery in American or Canadian stocks.

“Be mindful of trying not to pick the bottom and time the market and clearly don’t be emotional with respect to investment decisions,” he said.

The rebound, when it occurs, will be epic, he said, as investors turn to high-quality US and Canadian companies for growth.

“Focus on operating, performance, stability of earning, innovation, management team, good old fashioned fundamental stock picking,” he said.

Read more
Brian Belski Chief Investment Strategist
Margaret Kerins, CFA Head of FICC Macro Strategy
Michael Gregory, CFA Managing Director, Deputy Chief Economist and Head of U.S. Economics



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