International stocks declined last week amid soft economic data and the extension of social-distancing guidelines. Canadian stocks eked out a gain as oil surged 32% on prospects of a global deal to cut output and support prices¹. Positive sentiment, however, was undercut by the release of regional economic activity surveys that signal a sharp decline in global growth. Employment indicators also showed stress in the labor market, with the U.S. economy losing 700,000 jobs in March and unemployment rising from record lows. Since mid-March 2.1 million Canadians have filed for jobless benefits, pointing to a surge in unemployment in the coming months. In this uncertain environment we recommend investors consider systematic investing* and rebalancing instead of trying to time the bottom.

The stock market response to efforts to contain the global coronavirus pandemic was sharp and rapid. However, the magnitude of the economic impact of these efforts to contain the virus, through social distancing and business closures, is just starting to take shape.  The TSX ended the first quarter of 2020 down 21.6%, the worst quarter since the 2008 financial crisis¹.  With an economic downturn in the first half of the year becoming increasingly certain, here are answers to four key investor questions about recession.

What is a recession, and are we in one now?

Technically a recession is defined by two sequential quarters of contraction in the gross domestic product (GDP). The rapid onset of the coronavirus pandemic as both a health crisis and a global economic shock has shortened this timeline. It is already clear that the economy is near or in recession. For a look at how grim the economic data is becoming, recent data out of the US shows how jobs market, once a bright spot of the economy, is now showing the toll of the coronavirus impact. In just the last two weeks, 10 million Americans applied for unemployment benefits.  During the 2008 Great Recession it took 28 weeks to reach 10 million claims². 

The March jobs report released last week showed the first declines in job hiring since 2010, a staggering loss of 701,000 jobs after posting a healthy 283,000 jobs just one month earlier. The unemployment rate increased sharply to 4.4%, from a half century low of 3.5%³.   

In Canada we also expect to see job losses in March when the data is released next week and for losses to continue in April as social-distancing measures continue to ramp up. All told the unemployment rate could increase sharply from today's low levels.

How long will the recession last?

Though every recession is unique, there are often common triggers, like inflation being too high or asset bubbles that lead to economic downturns. Recessions tend to be short-lived, lasting about 11 months on average based on US data. In fact, since 1954 the economy has expanded seven months for every one month of contraction. The makeup of the COVID-19 recession is different than previous episodes. The economy was solid before the pandemic took shape – unemployment was low, inflation was well-contained near the Fed's 2% threshold, and there was no threat of an imminent asset bubble. 

The table below compares economic indicators in the quarter prior to the onslaught of a recession with the most recent economic data.  The unemployment rate was near a 40-year low, and the household savings rate was 3% at the end of last year compared to just 1.1% during the 2008-2009 recession though well below the 12% rate posted in the 1990-1992 recession. Inflation is also more moderate.  That means that the Bank of Canada has the latitude it needs to keep interest rates near zero until the economy recovers and an expansion takes hold. 

In fact, the cause of this recession is neither economic or financial.  It's biological.  In this respect, government policies to contain the viral economic impact on households and businesses, to limit its spread, to advance innovations to bring a vaccine to market, and to reduce the medical burden on the health care system play a role in determining the duration of the recession.

Towards these ends, the Canadian government has taken a number of actions to provide a lifeline to families and business most affected by the COVID-19 including:

• Canada Emergency Response Benefit (CERB) will provide a taxable benefit of $500 a week for up to 16 weeks to eligible workers who have lost their income due to COVID-19. 
• The federal government is providing up to an additional $300 per child through the Canada Child Benefit (CCB) for 2019-2020. The benefit will be delivered as part of May's scheduled CCB payment.
• Canada’s largest banks are offering mortgage payment relief to customers in the form of deferred mortgage payments.
• There's a moratorium on the repayment of Canada Student Loans
• The government announced plans to partially subsidize employee wages of highly impacted companies facing severe revenue losses
• The government also established the Business Credit Availability Program (BCAP) to provide $40 billion of additional support through the Business Development Bank of Canada (BDC) and Export Development Canada (EDC).  This program will be used to help coordinate with private sector lenders on credit solutions for individual businesses, including in sectors such as oil and gas, air transportation, exports and tourism."

Other stimulus measures in combination with accommodative monetary policy can not only help with the economic burden now but can also quicken the eventual recovery.

How will the market perform during the recession?

Historically, stock markets tend to peak about six months prior to the onset of a recession, with markets declining 34% on average from the peak based on US data. The good news is that stocks tend to lead recessions, as well, returning 25% in the year following a market bottom and 32% in the following three years on average¹.

The S&P 500 has fallen 25% from its record high, in line with historical bear-market averages⁴. However, the bottom will be determined not by the magnitude of the decline, but by progress made in limiting the viral spread. Despite the challenges ahead, improvement in market functions has been made in a very short period due to massive injections of monetary stimulus and asset purchases by central banks.  After showing a great deal of turbulence in late March, most segments of the bond market are resuming normal functionality, and the price dislocations in usual safe havens of government bonds and investment-grade corporate debt have started to ease.

What actions should investors take?

What not to do during a recession and bear market can be as important as what to do.  Trying to time the market low is one of the most common mistakes an investor can make, and it's one of the easiest blunders to avoid.  Precisely selling at the market peak and buying at the market bottom may seem like a good aspirational aim, but in reality it is very hard to do.  As we've witnessed in the last month of rapid market swings, pullbacks in the market are often accompanied in quick succession by strong rallies.  Bad news like the March job numbers can receive a muted reaction by markets if pessimism is already priced in to stocks.  Instead of trying to time the market, we recommend employing a systematic* approach to investing by taking advantage of market swings and investing at regular intervals, reducing both the emotional and timing aspects of decision-making. While it's impossible to control the economy or the markets, we can control our reactions and investment decisions by staying with a strategic investment approach before, during and after recessions.

<sup>Sources: 1. Morningstar Direct 2. Saint Louis Federal Reserve 3. US Bureau of Labor and Statistics 4. Bloomberg
* Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.</sup>

Nela Richardson, PhD
Investment Strategist

Canadian and U.S. markets will be closed on Friday in observance of Good Friday. Important economic data being released include the Bank of Canada's business outlook survey on Monday, housing starts on Wednesday, and the March jobs report on Friday.