In biology, nothing is clear, everything is too complicated, everything is a mess, and just when you think you understand something, you peel off a layer and find deeper complications beneath. Nature is anything but simple.

– Richard Preston

This time is different from our prior history with recessions. Previous recessions come to be following an excess of some sort — credit, over-consumption, excess capacity - rarely do expansions merely come to an end. Policy makershad a playbook in terms of what monetary and fiscal tools could be used. Yet, the cause of this recession (yes, we are entering a recession, in Canada, the United States and globally) is biological and therefore, something completely different.

We doubt a return to ZIRP (zero interest-rate policy) by the Federal Reserve, the Bank of Canada or other central banks will work to solve the short-term economic impact of a great and substantial pause in economic activity that the world is going through – let’s just call it The Great Pause for now. This was evident by the global sell-off on Monday despite the Federal Reserve unveiling a bazooka of stimulus measures. However, these measures will help to make sure that the plumbing in the financial system is working and it will provide fuel for the recovery once we mitigate the impact of COVID-19. We are far from that today. Fiscal policy meanwhile, will provide a better cushion near-term for those individuals and businesses affected economically as entire countries and borders around the world shut down for what is projected to be several weeks.

Where do we go from here? No one knows. Will North America follow the Chinese/South Korean path or the European path. The question of whether we will enter a recession is not if, but how long and how severe? Any attempts to answer that are futile; we just don’t have enough information and the information is changing daily, if not hourly.

What we do know, after the recent days’ volatility, the S&P 500 and S&P/TSX Composite Indices are each down approximately 30% from their record highs. What has caught everyone by surprise is the pace of the sell-off. The bear market of COVID-19 will go down as the fastest sell-off in history. Since 1968, we have had 12 bear markets with an average drawdown from the peak of approximately 32%. Our team believes that equities have the potential for more downside. Our valuation and earnings projections suggest the potential for further downside of -5% to -15%.

What do we do about it? We were underweight equities in our model portfolio ahead of the market crash. At these levels despite the potential for further downside – as bottoms are impossible to predict - we believe valuation is starting to look compelling and worth selectively adding to equities at this point.

We will be watching the rate of infections in Europe and North America. If we can follow the China/South Korean path, that at least provides a benchmark of what to expect going forward. We have yet to fully appreciate the economic impact of the containment effort, but we will be paying attention for an inflection point.

We are truly in unprecedented times. Be smart about your daily decisions.

Previous Bear Market Experiences

Peak	Value @ Peak	Trough	Value @ Trough	Drawdown	# of days (peak to trough)	Breakeven Date	spx @ breakeven	Days to Recover
2/19/2020	3386.15	3/16/2020	2386.13	-29.5%	18	Hopefully Soon		Hopefully Quickly
9/20/2018	2930.75	12/24/2018	2351.1	-19.8%	66	4/23/2019	2933.68	81
4/29/2011	1363.61	10/3/2011	1099.2	-19.4%	109	2/24/2012	1365.74	99
10/9/2007	1565.15	3/9/2009	676.5	-56.8%	356	3/28/2013	1569.19	1021
3/24/2000	1527.46	10/9/2002	776.8	-49.1%	638	5/30/2007	1530.23	1166
7/17/1998	1186.75	8/31/1998	957.3	-19.3%	32	11/23/1998	1188.21	59
7/16/1990	368.95	10/11/1990	295.5	-19.9%	63	2/13/1991	369.02	86
8/25/1987	336.77	12/4/1987	223.9	-33.5%	72	7/26/1989	338.05	414
11/28/1980	140.52	8/12/1982	102.4	-27.1%	429	11/3/1982	142.87	58
9/21/1976	107.83	3/6/1978	86.9	-19.4%	363	8/15/1979	108.25	366
1/11/1973	120.24	10/3/1974	62.3	-48.2%	437	7/17/1980	121.44	1462
11/29/1968	108.37	5/26/1970	69.3	-36.1%	370	3/6/1972	108.77	451
Average				-31.7%	267			478
Median				-27.1%	356			366

Source: Bloomberg, Manulife Investment Management. Current Bear Market Statistics as of end of day March 16^th, 2020

The following chart illustrates the price change from the peak for the 2018, European Financial Crisis, Asian Currency Crisis, 1990 Recession, Current Sell-Off and 1987 Stock Market Crash bear markets. The chart shows how many days it took to recoup the losses from the peak.

Macan Nia, CFA
Senior Investment Strategist

Important disclosure

A rise in interest rates typically causes bond prices to fall. The longer the average maturity of the bonds held by a fund, the more sensitive a fund is likely to be to interest-rate changes. The yield earned by a fund will vary with changes in interest rates.

Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a fund’s investments.

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