Stresses in the real economy have begun to emerge as the coronavirus pandemic continues. Kim Parlee speaks with Rob Vanderhooft, CIO, TD Asset Management about the toll the economy has taken from the virus and the trajectory of an eventual economic and market recovery.
- Hello, and welcome to Money Talk's COVID-19 daily bulletin for Tuesday, April 7. My name is Anthony Okolie. In a few moments Kim Parlee will be speaking with Rob Vanderhooft-- he's the Chief Investment Officer at TD Asset Management-- about the extreme market volatility. But first, a wrap up of today's market news.
3M has reached a deal with the White House to continue sending much needed N95 masks to Canada. Shipments had been blocked by the Trump administration, which tried to force the company to prioritize American demand.
Some signs of hope from global hotspots. For the first time since January, China has reported no new deaths from the coronavirus. Meanwhile, South Korea saw fewer than 50 new cases of infection for the second consecutive day.
The price of oil is trading higher on optimism Saudi Arabia and Russia could agree to an output cut at an upcoming meeting on Thursday. COVID-19 may be changing TV viewership habits. With no sporting events to watch, US consumers have been cutting expensive pay TV packages, and opting for standalone broadband services instead.
And a little help from our friends. UK researchers are training dogs with a keen sense of smell to diagnose COVID-19. The group hopes to deploy the dogs in as little as two months. And that's a wrap up of today's market news.
And next we have Kim Parlee and Rob Vanderhooft on the extreme market volatility, and what investors should be doing in these uncertain times.
- Rob, I want to start with just the big picture, if we could. We've just closed the worst quarter since the financial crisis in 2008. What is your assessment of where we are now?
- I mean, certainly we've seen a massive negative revision to Q2 GDP, really globally. And looking at the US, some estimates could be down as much as 50% And so that is obviously very difficult to deal with.
On the positive side, though, if there is any positive news at this point, we have seen the virus curve roll over in a number of countries. You did see Governor Cuomo come out the other day in New York and talk about perhaps seeing the peak in New York right now. And so the markets are, and have been, beginning to discount some of that relatively positive news.
- I think to say that we've seen the equity markets be volatile would be an understatement. But I know a lot of people are talking about time arbitrage, trying to figure out if they should get in now or wait till later. This is a fancy way of saying timing the market. What's your concern around that right now?
- Yeah. Again, I mean, timing the market is remarkably difficult. If you look at the S&P 500, it was down about 35% from peak. Already we're up about 19%, 20% from that low. And again, from our perspective, we're not out of the woods. There is still a considerable amount of risk. But the challenge is in trying to time that. We did see pretty negative flows really at the bottom. And a lot of people who sold at the bottom, the opportunity to get back in, it's difficult to then step back in.
From our perspective, what we look to do is to maintain long term asset mixes for our clients, a long term perspective. And where we have asset mix control, we have begun to rebalance. In fact, we were in the equity market, rebalancing in the last week or so. And we were buyers in the equity market too to get clients back up to their long term asset mix perspective.
And so again, doing that consistently, with an eye on the long term is really what we're trying to achieve.
- Well, let's get into a little more detail, though, on your asset mix. And you talked about equities right now and some of the rebalancing you're doing. But just we'll go through equities, alternatives and fixed.
But with equities, I mean, it's got to be tough right now. I mean, so much is based on valuation. And valuation is based on forecasting. And that's tough.
- Yeah. And again, we're consistently looking at as much information as we can in trying to get a beat on what the earnings for companies will be, and what the earnings for the market in aggregate will be as well.
And so we do expect obviously a recovery to begin at some point in the not too distant future. And again, looking at really what the expectations are, what the valuations are, and making decisions on equities. But again, within that context, making sure that we have for our asset mix, continue to maintain that long term perspective, and take views on equities, versus fixed income, versus alternatives as well.
- Rob, you talked a bit about rebalancing. And maybe just if you could, give us an overview from an asset allocation perspective, a little more on equities, alts, and fixed income.
- Yeah. In terms of asset allocation, as we've talked about previously, very little risk on at this point in terms of how we are positioned. We do see equities in the next 12 to 18 months being relatively more positive than fixed income. Obviously, interest rates are very, very low at this point. We do expect those to begin to move up as we emerge from this crisis.
With respect to alternatives, I think we'll probably see a bit of an income hit in the shorter term. But again, these are very long duration assets. So they're generally positively related to interest rates as well. And so, again, a mix of interest rates having come down makes the long term nature of those assets worth more, versus a bit of an income hit in the shorter term. And so we're still positive on alternatives as a significant part of our portfolios as well.
- Do you get a sense of-- I mean, there's so many people trying to figure out what an economic recovery looks like. I mean, at the more simple, is it a V? Is it a W? Or could we see further outbreaks, which are going to just change what normal looks like in the next little while. Do you have any sense of what you guys are evaluating for a base case?
- Yeah. We certainly don't see a V outcome really occurring. I think there's a lot of underlying damage done in small to medium sized businesses, which, again, in the financial press perhaps we don't pay as much attention to. And if you look at, the Canadian Federation of Independent Business did a survey. And 32% of small businesses may not open again after this. And so that's a pretty concerning statistic. And again, so we're doing significant damage to the underlying economy. We do think it will recover, but more of a slow recovery than a V recovery going forward.
I would say then also in Canada relative to the US, we are also seeing a significant impact from oil prices. So we've layered onto this crisis a bit of an oil price war between Russia and the Saudis. And that's been very, very negative for economic growth in Western Canada, and therefore, for economic growth all throughout Canada.
- Last question for you, Rob. I mean, we've all discovered that-- I mean, to say things have been disrupted is, again, an understatement, I mean, in terms of how we do business. But in terms of clients and their objectives, I mean, that's one of the key things we got to keep in mind is moving towards those end goals, because those have not changed.
- No. No. No, they aren't. They haven't. And we continue to work to invest for clients, and, again, maintain a very long term perspective, to continually evaluate what's going on in the market, and to make decisions on that basis.
And again, we've seen massive changes to how we do business in a sense as well. We're all essentially working from home now. And so we've moved. The 800 or so TD Asset Management employees, there's only a handful that are going to offices at this point. And that's a significant pivot. And again, a lot of the business continuity management things that we've seen didn't necessarily anticipate the social distancing that was required. But again, I think we've adopted and are working very, very efficiently.
- Rob, great to talk to you. And we look forward to talking to you again soon.