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Who would have expected that 2020 would grind to a halt less than a quarter of the way through the year? With the highly unexpected spread of coronavirus, also known as COVID-19, changing Canadian life abruptly, Canadians must remain informed and proactive, especially when it comes to their finances.
While Canadian’s aren’t technically experiencing an economic recession at the moment, the financial climate provokes a similar reaction, as the ways we spend and earn money have been altered quite abruptly within the last few weeks.
A recession is a period in which a country’s economy experiences a decline for more than two fiscal quarters, the equivalent of 6 months in a calendar year.
Recessions cause a ripple effect that affects a nation’s financial health. This primarily involves the value of goods, products, and services, all of which make up a country’s Gross Domestic Product (GDP).
The stock market, employment and the decline of consumer and business spending are all greatly affected a recession as well.
Read our blog: How to prepare for a recession
This article chronicles the effects of COVID-19 on the economy and the stock market, with additional information on how various types of saving accounts and investments can work for Canadians.
Disclaimer: News surrounding coronavirus is changing quickly. While Ratehub.ca staff updates this article frequently, some information might be outdated.
Check out the Ratehub.ca guide to COVID-19 guide – Personal finance during COVID-19
Timeline: The stock market decline of 2020
Below, you’ll find a brief chronicling of the current situation involving the 2020 stock market.
The publishing date of this article is March 17, 2020. Ratehub.ca staff plan to update this article as more information becomes available.
- January 25, 2020: The first case of coronavirus on Canadian soil is reported.
- February 19, 2020: The Dow Jones Industrial, NASDAQ Composite, and S&P 500 all reach record highs.
- February 20, 2020: The stock market’s decline begins in response to the coronavirus pandemic.
- February 25, 2020: Stock markets around the world close down.
- February 28, 2020: Stock markets around the world report their worst decline since the Great Recession of 2008.
- March 4, 2020: The Bank of Canada (BoC) announces that the prime rate would drop by 0.5% to 1.25%, from the initial rate of 1.75%.
The impact of this affects interest rates. In some ways, the rate cut had a positive effect on consumers, as mortgage rates and loans would decrease.
The other side of the coin doesn’t show a positive face, as savings accounts and investment products like GICs saw an interest rate decline. Another reaction to the rate drop sees the exchange rate for the Canadian dollar decline, among other monetary repercussions.
- March 9, 2020: Merely one week later, on March 9, markets drop another 7%, thus noting the worse drop since 1987, earning the title ‘Black Monday’ and denoting the stock market’s official decline.
- March 12, 2020: Stock markets in Europe and North America drop further, earning the name Black Thursday. The three U.S. stock indexes fall an additional 9%.
- March 16, 2020: The BoC drops its overnight rate from 1.25% to 0.75%
Two weeks shy of the previous rate cut, the BoC announced that on March 16, the overnight rate would drop once again. It would follow in similar footsteps as the last drop rate, dropping another 0.5% down, marking the new standard to 0.75% from 1.25%. This marked the most aggressive rate drop since 2008.
- March 17, 2020: The Government of Canada announces the COVID-19 Economic Response Plan. The plan details financial support to workers, parents, business owners, among other Canadians affected by the pandemic.
- March 25, 2020:The Dow-Jones Industrial (Dow) closed up at a 2.4% gain. The S&P also saw a higher note, up by 1.2%. Both are a direct result of the U.S. Government announcing a $2 trillion stimulus deal. This marks the first up-close since the beginning of February 2020.
Looking forward: Emergency funds and investing options
Life is unpredictable, and you’ve probably seen a lot of personal finance topics on the importance of an emergency fund. Emergency funds act as a financial safety net when finances and work have been compromised. Savings in an emergency fund come in handy when you experience job loss, a pricey car repair, or any other unforeseeable expenses.
A high-interest savings account is a good option for an emergency fund. These types of savings accounts offer higher interests than regular savings accounts and allow you access to your money whenever you need it.
If you have a more substantial sum that you would like to invest but aren’t comfortable with the stock market’s volatility, a Guaranteed Investment Certificate (GIC) could be an option to consider. However, it is important to remember that with a GIC your funds are locked away until maturity.
High-Interest Savings Accounts (HISAs)
High-interest savings accounts with a reasonable interest rate can help you earn more money in a shorter amount of time, while, in some cases, keeping in pace with the inflation rate. Savings accounts also offer you access to your money at any time and come in a variety of shapes and forms.
- High-interest savings accounts are savings accounts that provide higher interest than traditional savings accounts.
- It’s important to note that there are various types of savings accounts:
Guaranteed Investment Certificates (GICs)
GICs aren’t ideal for emergency funds, but in the short term could see your money secure for the deposit’s term. As their name suggests, Guaranteed Investment Certificates (GICs) are a safe investment. If you were to lock a higher GIC rate right now, you would keep that rate even when the rates drop, however, you would also have to keep your funds invested until your GIC matures.
- GICs with a fixed-interest rate allow you to maintain a steady return, regardless of how the economy is doing.
- Funds in a GIC are not accessible—making them unideal for emergency funds—but provide returns that don’t fluctuate. They’re also recession-proof if the GIC rate is fixed.
- GICs are term deposits ranging between one month or as long as a decade in length.
Robo-advisors and online brokerages
For those who already have an emergency fund and have extra cash that they can afford to risk in investments, investing with a robo-advisor or an online brokerage might serve as a suitable option to enter the market. However, it’s essential to recognize that investing during a highly volatile time comes with a lot of risks—even though risk capacity is adjustable.
- Robo-advisors manage investments on behalf of investors using an algorithm, a form of passive investing.
- Online brokerages allow investors to make self-directed trading decisions into various types of investments. This is known as self-directed trading, also known as active investing, which can be quite volatile and takes some experience.
- Most robo-advisors and online brokerages offer registered and non-registered investing accounts.
- Currently, many stocks, bonds, and exchange-traded funds (ETFs), among other investments, are available at lower purchase prices due to the stock market’s decline.
The bottom line
With COVID-19 at the top of everyone’s mind, it’s crucial to build a financial strategy for the foreseeable future while the world deals with this pandemic.
Some useful personal finance tips include:
- Making a dedicated budget for the following weeks ahead that considers your immediate necessities.
- Temporarily lowering or minimizing your monthly expenses.
- Reviewing the Government of Canada’s COVID-19 precautionary measures.
And, most important of all, take all of the necessary steps to make sure you, your friends, and your family are doing well during this uncertain time.