In this article, Philippe Bouchard, a financial security advisor and mutual fund representative, answers some common investment questions.
"I've heard that the coronavirus could plunge the economy into a recession or even a depression. What does this mean and how will it affect my investments?”
In times of great uncertainty, media coverage inevitably fuels fear in the markets. The words “recession” and “depression” have been all over the news lately, so it’s normal to have questions about your investments.
Since the COVID-19 pandemic took hold so quickly, the real impact in terms of numbers remains to be seen. The major companies that make up the stock market indexes will be posting their earnings per share (EPS) in the coming days. This is a key ratio that measures a company's earnings and performance and shows how the share prices of different companies in the same industry stack up.
The S&P 500, a stock market index that tracks 500 large-cap companies listed on US stock exchanges, has rebounded by more than 25% in record time since March 23. But the publication of EPS results in the coming days will provide a clearer picture of corporate finances. Once these results are published, analysts and portfolio managers may feel that the average price-to-earnings ratios of the main stock market indexes are overvalued compared to their historical average. This could point to a potential decline in the short to medium term.
Most economists agree that a recession—defined as 2 quarters of negative GDP growth—is imminent. A depression, on the other hand, is defined as a decline in GDP of 10% or more for a period of more than 2 years.
The outcome in the short to medium term will also depend on how long lockdown measures remain in place, both here and elsewhere in the world.
"Should I sell all my investments and buy back in when the market bottoms out?”
Faced with the anticipated effects of COVID-19 on financial markets, many clients are wondering whether they’d be better off selling all their investments and buying back in at a lower price point when the market bottoms out.
Obviously, it’s impossible to advise on individual situations without knowing the specific circumstances. However, this type of strategy is unlucky to succeed, since the investor would have to time the market perfectly.
The economic literature and statistical analyses clearly show that there is, on average, no added value in trying to time the market for an investor with a fairly long investment horizon (10 years or more).
There are 2 main arguments against trying to time the market. First, the investor has to be right not once, but twice—once when they sell and once when they buy. This is extremely difficult to do consistently, even for savvy investors.
Second, for a long-term investment, simply missing the best few days of returns over a fairly long period of time can have a devastating effect on the future value of an investment portfolio. It’s therefore in the best interest of most investors to stay focused on their long-term strategy, which should reflect their profile, risk tolerance and investment horizon. This article highlights some approaches to help investors cope with these unprecedented circumstances.
"What’s going on with the price of oil? And how will this affect the economy?”
Under different circumstances, consumers would be happy to be paying 1990s-era prices at the pump. But some clients are worried about how plummeting oil prices will affect the Canadian economy. With the world's attention focused on the coronavirus, an oil price and production war, initiated by Saudi Arabia, has driven the price of oil down to an all-time low.
And that’s not all: lockdown measures in place around the world have wiped out global demand for oil. Industries that are usually the top consumers of fuel, such as air and sea transport, are now paralyzed. The rules of supply and demand apply—as long as supply exceeds demand, oil inventories will rise and pressure on prices will continue.
Such a sharp drop in the price of oil, although good for the pocketbooks of consumers who pay less to fill up, is a major wealth destroyer for many global companies.
In the immediate term, it’s difficult to accurately assess the impact of oil prices on the Canadian economy. But it’s clear that the survival of some businesses—and many jobs—is in jeopardy. Some provinces, such as Alberta, Saskatchewan, Newfoundland and Labrador, and British Columbia, could be more severely affected than others.
ABOUT PHILIPPE BOUCHARD
Philippe has a bachelor’s degree in finance from Stony Brook University in New York and nearly 15 years of experience in capital markets and corporate finance. He worked for investment banks, including RBC Capital Markets and JP Morgan, for a number of years, primarily in Toronto. Between 2007 and 2014, he also worked as an independent trader specializing in interest rate derivatives at the Montreal Exchange (TMX) and the Chicago Board of Trade (CBOT) before becoming a financial security advisor. He works mainly with healthcare professionals and entrepreneurs.
In his spare time, Philippe enjoys playing baseball, hockey, golf, tennis and other sports. He also has a keen interest in travel, although these days he mainly focuses on spending quality time with his 3 boys aged 8, 3, and 2 months.
Financial Security Advisor
Centre financier Vaudreuil-Dorion, Life and Health Insurance Firm
388 Avenue Saint-Charles
Vaudreuil-Dorion, QC J7V 2M6
Mutual Fund Representative
SFL Investments, Financial Services Firm
1200 Boulevard Chomedey, Suite 300
Laval, QC H7V 3Z3