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Investors hit the panic button on Monday and the result looked like a rerun of September, 2008.

The Dow suffered its worst one-day point loss in history. It plunged 2,013 points, taking it back to levels last seen in December, 2018. The S&P/TSX Composite lost 1,660 points and was off almost 15 per cent for the year when the closing bell mercifully sounded on Monday.

Investors were already spooked by the human and economic effects of the novel coronavirus and resulting COVID-19 disease. Then Saudi Arabia and Russia decided on the weekend to play their own game of beggar-thy-neighbour, sending oil prices plummeting and driving down the shares of energy companies.

We have not seen this kind of volatility in more than a decade. At one point on Monday, the CBOE Volatility Index touched 62.12, its highest mark since the financial crisis of 2008.

We saw a rally on Tuesday, but don’t read too much into it. We should expect more gut-wrenching volatility in the future. There are more difficult days ahead for investors.

It’s impossible to predict the future in this turbulent environment, but here’s what I expect to happen.

Things will get worse before they get better

The Bank of Canada said as much in announcing a half-point rate cut last week. “COVID-19 represents a significant health threat,” the bank said. “It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.”

The number of confirmed cases will grow exponentially

Last week, I asked a Florida doctor who runs a large medical clinic what she would do if someone walked in displaying COVID-19 symptoms. “I’d have to send them elsewhere,” she said. “We have not received any test kits for the virus.”

That comment speaks to the state of unpreparedness in the United States and suggests that the number of infected people in the country may be far higher than reported. Washington State, for example, now says the virus was circulating there for weeks before it was finally detected.

U.S. Vice-President Mike Pence, who is co-ordinating the Trump administration’s task force on virus response, admitted that while more test kits are being distributed, they are still in short supply. Meanwhile, the guidelines of who should be tested have been broadened. The end result, once more kits are available in the coming weeks, will probably be a big spike upward in the number of confirmed cases.

Interest rates will go lower

The half-point drops in the U.S. and Canada last week were greater than expected, but may just be the beginning. If health and economic conditions worsen, we could see rates back at 2008-09 levels before year-end. “As the situation evolves, [the Bank of Canada’s] governing council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target,” the bank said.

That could conceivably mean that the negative interest rates we’ve seen in Europe and Japan could take hold here. “As it scrambles to protect the U.S. economy from the far-reaching fallout of the coronavirus, it can be expected that it [the Federal Reserve Board] could take rates back down to zero – emergency territory – in the next few months,” said Nigel Green, chief executive of deVere Group, one of the world’s largest independent financial-advisory organizations.

“This then raises the spectre that the Fed will ultimately follow its peers in Europe and Japan by adopting negative interest rates.”

The result, he says, would be to push up the prices of financial assets, including equities.

Bond prices will rise

As yields fall, bond prices rise. As of the close on March 9, the FTSE Canada Universe Bond Index was up 7.47 per cent for the year, well ahead of the TSX, which was down 14.94 per cent. That’s a differential of 22.41 percentage points.

Interest-sensitive stocks will hold up better

As rates continue to fall, interest-sensitive equities will perform better than the broad market, a continuation of what we saw in 2019. As of March 9, the S&P/TSX Capped Utilities Index was up 0.93 per cent so far in 2020. That’s not a big gain, but it looks a lot better than the Composite. The Capped REIT Index was down 1.73 per cent – again, much better than the broad market.

Gold remains a haven

The price of gold moves steadily higher as virus concerns increase. As of Tuesday afternoon, it was down for the day, trading under US$1,650 an ounce. But it’s up about 8 per cent for the year and will probably go higher if the coronavirus crisis intensifies.

The take-away is that we are going to have to live with uncertainty and volatility for many months. Make sure your portfolio is weighted toward bonds, cash, gold and defensive, dividend-paying securities – and hang on.

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