Dow Falls Below 20K as Stimulus Packages Announced

Today, the Dow Jones Industrial Index fell below 20,000, a mark it first achieved on January 25th, 2017. To give you an idea of how dramatic this drop is, just six weeks ago "Dow 30k" hats were the hot commodity for millenials who wanted everyone to know that they work in finance. You can still buy those hats, although you can also buy "Dow 20k" hats at the same webstore and t-shirts that read "Panic at the Costco." Sometimes pop culture is our best market indicator.

Here's the Dow's performance in 2020:

Source: Bloomberg, March 18th

And here's the S&P 500's performance this year. The S&P 500 fell more than 7% today, triggering circuit breakers and bringing a halt to trading.

Source: Bloomberg, March 18th

We're seeing the price of equities and the price of gold both fall, which indicates a race for liquidity rather than a race for quality. In conversations with our fixed-income traders, we're hearing that a bare-knuckled fight for liquidity is firmly underway.

Stimulus Packages Begin to Roll Out

It's becoming obvious to everyone involved that monetary policy alone is not going to solve this crisis. Adjusting the rate at which banks borrow from each other overnight is not going to solve problems like "nobody is going to work" and "a good deal of economic activity is currently banned." Enter fiscal policy, the practice of adjusting government spending and taxation. Advocates of fiscal responsibility typically oppose using government resources to "grease the wheels," and they are going to be haunted by the sound of the money printer working overtime for the foreseeable future.

This morning, Canadian Prime Minister Justin Trudeau announced an $82 billion stimulus package that includes $27 billion of direct support and $55 billion of tax deferrals. The primary motivation of this direct support is to allow businesses to continue functioning and give people the resources they need to self-isolate.

The United States is still figuring out the extent of its stimulus package, although the battle lines aren't being drawn the way you'd expect. Utah Senator Mitt Romney opened the bidding at $1,000 a month to every adult, and Donald Trump is looking for $850 billion to $1 trillion in total aid. For those keeping track at home, that's higher than the plan the Democrats are pitching.

COVID-19 Cases Continue to Grow

Here are the resources we're using to track the growth of the pandemic:

• WHO Situation Reports, which are the official line

• This live case tracker, which is a little more readable

There's a couple important takeaways from recent reports. Firstly, China's aggressive policy of isolation and suppression appears to have worked, with 87% of cases having recovered and new cases declining. The special new hospitals that were built to deal with the crisis are being decommissioned as the number of new cases apparently does not require them. Secondly, the epicenter of the pandemic appears to have shifted to Europe, or possibly the United States. Only time (and testing) will tell.

How will we know that things are getting better? The important number is not total cases, as that doesn't tell you much about the growth of the pandemic. The number of new cases doesn't tell you much either, as many people are still incubating the virus, not experiencing any symptoms, and not yet being tested. The important number is growth in the number of new cases, or today's new cases divided by yesterday's new cases. Once this coefficient reliably falls back to 1.00, the pandemic will have reached an "inflection point" and the end will be in sight.

Are "social distancing" techniques necessary, and are they working? The approach is mathematically very sound, and the Washington Post's illustration of the concept is the best we've seen. However, the Imperial College of London's report on social distancing's effects finds that while the practice is certainly helpful, it's not enough to ensure a quick and painless return to normalcy. We will likely be living with the knock-on effects of COVID-19 for longer than anyone predicted, although the virus will pass.

Market Outlook

The "flight to safety" that we saw push government bond yields to rock bottom levels has reached the US dollar, which has become the hottest commodity in the world. While the yields on US treasuries have hit negative numbers for the fist time in history, the USD/CAD rate has reached six-year highs. Clients with US dollars could consider repatriating their funds now.

Source: Bloomberg, March 18th

Any market present challenges and opportunities. Right now, the challenge is getting a hold of dollars and the opportunity lies in trading them for anything else. For clients with enough cash to comfortably last for the foreseeable future, basically any asset class other than cash and government debt is at generational lows. We've pointed to the remarkable dividend yields available right now, but we are stressing: investing now requires accepting higher-than-average volatility for the near future.

We'll stress this point last: there's no real precedent for this kind of market. This isn't really a financial crisis, as the source of the problem is not the banks. It's not a manufacturing recession either, it's a human health and services recession. Taking advantage of this opportunity will require a new playbook, creative thinking, and an ability to learn fast.

If you'd like to talk about these events or discuss your portfolio, don't hesitate to reach out to us at 604.643.0101.

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.