The economic cost of the COVID-19 crisis may pale in comparison to the human cost. Many people fear for their own health and that of their loved ones. As such, there is a “real” element to the fear factor. Measures to contain the virus have upended supply chains and financial markets and have weighed on commodity prices. Consumer and business confidence are expected to remain subdued for some time, not least if fears of a second wave of the virus linger. We are monitoring these developments and have maintained our previous Recession outlook for the U.S. economy to reflect a Recession beginning in March and extending through the end of the year, as the situation will deteriorate further before beginning to recover.

With lockdowns in place across much of the world, the IMF has downgraded their forecasts further in recent days, now forecasting global real GDP to fall by over 3% this year. That compares with a pre-virus forecast assuming growth of about 3%. This means that 2020 is set to be the worst year for the global economy since the end of the Second World War, when world GDP in 1945 plunged by 5.5%.1

The Fed has launched many new programs. The U.S. was on track for an outright fiscal drag in 2020 due to expiring stimulus, living with the largest fiscal deficit and thus is the least capable of delivering more fiscal stimulus. The Federal Reserve has now expanded its balance sheet beyond $6 trillion, an increase of almost $2 trillion in less than a month.2 It has taken extraordinary steps to lift regulations to help banks play their part in the relief effort. One consequence may be that central bank support could help most risky assets to outperform safe ones by a wide margin as these measures go far beyond conventional monetary easing in their efforts to backstop the financial system. With a policy interest rate that has been cut to a range of 0% to 0.25% and commitment that rates would stay low indefinitely, the supply of funds outside of the Feds own money creation may become scarce. By virtue of a system that promotes superior productivity growth, the country’s knack for nurturing world-beating companies, and less challenging demographics than the developed world, there is some hope that the U.S. can outpace most of the developed world in economic recovery.

Canada will rack up debt faster in this crisis than any other developed country, relative to its economy, according to data from the IMF. It is fortunate that Canada’s governments went into this economic crisis in a much better financial position than most other developed countries. Net government debt (total government debt minus its cash holdings) was at 40% of economic output before the crisis. The average for developed countries was 107%. This may be why Canada’s governments have proven more willing to spend their way out of the crisis than some others.3

Global markets in Q1 were devastated by the coronavirus pandemic. U.S. equities posted their worst quarter since 2008, with the S&P 500 down 19.6%. The S&P MidCap 400 and the S&P SmallCap 600 were down 29.7% and 32.6%, respectively. Canadian equities were likewise battered, with the S&P/TSX Composite down 20.9% for the quarter. The Canadian Energy sector was down by 30.8% in March and 37.2% in the first quarter. The global pandemic fears also spread rapidly across Europe. Italy, and then Spain. The S&P Europe 350 fell 14.0% in March to complete a 22.4% drop this quarter, the worst monthly and quarterly performance since September 2002. International markets were not spared, and the S&P Pan Asia BMI was down by 20% for the quarter. U.S. Treasuries benefited from a flight to safety. Corporate bonds fared less well, as spreads widened across sectors and grades of the credit market.

In April, we maintained the asset allocation positioning that we established on February 19th. This reflects our view on deflationary and recessionary influences that dominate the global economy.  Allocation to equities was reduced in February to 12% in Tactical Conservative, 17% in Tactical Moderate Growth, 26% in Tactical Growth, and 34% in Tactical Aggressive Growth. In February, within the Fixed Income allocation, we added the 20+ year Treasury Bond. Gold continues to be present in all models as it performs well in high risk, low yield environments as a risk-free asset class. Gold has played an important role in portfolios as a source of liquidity and collateral. As has been the case in previous market selloffs, we have seen that the stronger the pullback in the stock market, the more negatively correlated gold becomes.

This shutdown will cause the greatest short-term drop in output that the global economy has ever experienced, and the pace of the subsequent recovery is hard to determine at this time. No one knows how long the supply and demand disruptions will constrain growth. We will continue to monitor the data for growth, inflation, and recession signals from employment, consumer spending, business sentiment, Fed policy, the yield curve, inflation, and global economics. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.


Deborah Frame, President and CIO


1 Capital Economics. Global Economics Update. March 31, 2020.

2 Capital Economics. U.S. Economic Update. April 16, 2020.

3 National Bank of Canada. Public Sector Debt. April 15, 2020.


Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. March 31, 2020. Index performance is based on total returns and expressed in the local currency of the index.