The month of March was one to forget for many investors. In February, the Dow Jones Industrial Average reached a record high, but the market entered the bear market territory at a record pace. It took just 22 days for the Dow to decline more than 20% off its peak, or enter a bear market in other words, which is the fastest decline on record books.
Source: Path Financial
In the last week of March, however, the major stock indexes recovered, driven by the increasing hope that the trillion-dollar stimulation packages introduced by the United States government will revive the economic growth of the country and the region. Even after this surge, the performance during the last 30 days remains disappointing.
In Canada, things were no different either. The markets entered a free fall at the beginning of March but recovered in the last week.
COVID-19 related developments, understandably, were at the center of global market performance in March, which is one of the primary reasons why global markets exhibited similar performance characteristics during the month.
Health Care stocks weathered the storm better in America but not in Canada
Not a single business sector could survive the carnage in March, but health care stocks weathered the storm much better than other sectors. Investors are betting on mega pharmaceutical companies to develop a vaccine to fight COVID-19 sooner rather than later. In fact, companies such as Moderna, GlaxoSmithKline, Johnson & Johnson, and Gilead Sciences, are already conducting clinical trials. Based on this backdrop, investors continued to bet on the industry-leading health care names in March, which ensured a significant outperformance from this sector in comparison to the broad market.
Sector-wise U.S. market performance
In Canada, however, the performance of the TSX Health Care Capped Index was a complete contrast to its American peers. The Index reported a decline of over 25% in March, which was primarily driven by the bloodbath in Canadian marijuana companies, including Aurora Cannabis. While the world continued to fight against COVID-19, cannabis companies were left alone as none of these companies were in a position to join this fight. The below is an illustration of the performance of a few companies included in the TSX Health Care Index.
This divergence in performance between American and Canadian health care companies could extend into the rest of the year as well, and identifying this trend early could benefit contrarian investors throughout the year.
Central Banks are coming to the rescue
During the financial crisis of 2008, monetary policymakers were late to react, according to many economic experts who have conducted extensive studies into the housing market collapse and the eventual bloodbath in capital markets on a global scale. However, the actions of policymakers in March assure the fact that these institutions have learned their lesson the hard way. Many authorities across the world sprung into action to help financial markets, starting from the Federal Reserve of the United States.
The Federal Open Market Committee decided to cut rates to near-zero in an emergency rate cut, which was intended to support the credit growth of the country when businesses need it the most. The reduced business activities resulting from the partial lockdown of the country are already hurting many business sectors, and the Fed is hopeful that near-zero rates would help these companies borrow at attractive rates.
Source: Trading Economics
In addition to tweaking policy rates, the Fed committed to buying at least $500 billion in treasury securities and $200 billion in mortgage-backed securities in a bid to pump more liquidity into the financial system of the United States. These are unprecedented measures that were not seen before the last recession. Rather, these types of initiatives were taken in the post-crisis era, which was too late to save the economy from a significant collapse.
Bank of Canada was also up to the task in March. The policymakers were forced to cut the primary lending rate three times in March. With the latest cut on March 27, the policy rate is now at 0.25%, which is considered as the floor by decision-makers.
Source: Bank of Canada
In addition to rate cuts, the Bank of Canada unveiled a plan to buy at least C$5 billion a week of Government of Canada Securities, starting on April 1. This quantitative easing activity will continue until the economy stages a recovery from the expected lows. Reuters, on March 31, reported that the Canadian central bank will likely buy more than C$200 billion worth of treasury securities under this plan.
Similar kinds of policy decisions were made in Europe and Asia as well, which is an indication of the global effort to reignite economic growth.
Both Asian and European equity markets performed in line with North American indexes. This was expected to be the case as the decline is driven by a pandemic, which is hurting most global economies alike.
Asian market performance
It comes as a surprise that equity indexes in China provided similar returns to that of their global peers. The city of Wuhan in Hubei Province in China was the epicenter of this pandemic, and the country went into a lockdown of nearly two months. An investor would have expected to realize much worse returns from Chinese markets in March, but as the country slowly began to get back into work in the latter half of the month, stocks gained traction. The below is proof that China is slowly but surely returning to its normalcy.
Source: Harvard Business Review
A similar type of trend can be expected in North America once the spread of the virus is contained.
Conclusion: A disappointing performance in March, but there are silver linings
There’s no denying that many investors became the victim of the market crash in March. However, as many countries are implementing strict measures to curb the mobility of residents, COVID-19 will most likely spread at a slower pace in April. Even though the number of global cases is rising, the 5-day rolling average of reported cases has been declining throughout the last week.
Source: Vince Truong/ Worldometers
This is a silver lining for investors. If the United States, Canada, and European countries can follow the lead given by China, the spread of the virus will come to a standstill by the end of April, and businesses will resume their normal course of action. This, in return, will lead to a surge in stock prices on a global scale. The expected performance in April entirely depends on how effectively the governments across the world can contain COVID-19.