FIVE WARNING SIGNS ABOUT THE MARKETS.
TSX also takes a hit amid rate jitters
U.S. stocks slumped Friday, pulling down the Dow Jones industrial average by more than 650 points and handing the U.S. market its worst week in two years.
Technology, banks and energy stocks accounted for much of the broad slide. Several major companies, including Exxon Mobil and Google’s parent company, Alphabet, sank after reporting weak earnings.
Canada’ s main stock index also took it on the chin, sliding more than 250 points, down 4 per cent over the past week, in a broadbased decline that included drops in every sector. The S& P/ TSX composite index fell 254.89 points to 15,606.03.
The last such drop on the TSX was more than seven months ago when it lost about 269 points on May 17, 2017. While all sectors finished Friday in the red, shares in health care saw the steepest losses of an average 6.18 per cent.
Cannabis stocks led the decline in the sector, with Canopy Growth Corp. dropping $ 3.44 or 12.49 per cent to $ 24.11, while Aphria Inc. shares fell $1.60 or 10.34 per cent to $ 13.88. Both were among the top three worstperforming shares on the TSX Friday.
In the U.S ., fears of rising inflation sent bond yields higher and contributed to the stock market swoon after the government reported that wages grew last month at the fastest pace in eight years.
The sharp drop follows a long period of unprecedented calm in the market. American markets haven’t had a pullback of 10 per cent or more in two years, and hit their latest record highs just one week ago.
“We’ve enjoyed low interest rates for so long, we’re having to deal with a little bit higher rates now, so the market is trying to figure out what that could mean for inflation,” said Darrell Cronk, head of the Wells Fargo Investment Institute.
The i ncrease i n bond yields hurts stocks in two ways: it makes it more ex- pensive for companies to borrow money, and it also makes bonds more appealing to investors than riskier assets such as stocks.
The Standard & Poor’s 500 index fell 59.85 points, or 2.1 per cent, to 2,762.13. That’s the biggest loss for the benchmark index since September 2016. The S& P 500 has lost 3.9 per cent since hitting a record high a week ago.
The Dow Jones i ndustrial average l ost 665.75 points, or 2.4 per cent, to 25,520.96. The Nasdaq slid 144.92 points, or 2 per cent, to 7,240.95. The Russell 2000 index of smaller- company stocks gave up 32.59 points, or 2.1 per cent, to 1,547.27.
While interest rates are still low by historical standards, meaning borrowing is still relatively cheap for businesses and people, they’ve been rising more swiftly, and that’s what has markets on edge.
“The pace of rate increases is more important than the level,” said Nate Thooft, senior portfolio manager at Manulife Asset Management.
The increase in rates has been driven by the prospect of stronger economic growth, and higher inflation, in the U.S. and abroad.
Bond prices declined again Friday, pushing yields higher. The yield on the 10- year Treasury note, a benchmark for interest rates on many kinds of loans, in- cluding mortgages, climbed to 2.83 per cent, the highest level in roughly four years. The rate was at 2.41 per cent four weeks ago and 2.66 per cent on Monday.
“Once we started going north of 2.5 per cent, and you put that together with an overbought market, it had the ingredients of a selloff, especially since January was so strong,” said Jeff Zipper, regional investment strategist at U. S. Bank Private Wealth Management.
The S&P 500, which many index funds track, soared 5.6 per cent in January, its biggest monthly gain since March 2016.
The expectation among i nvestors has l ong been for a gradual rise in interest rates, as the Federal Reserve slowly pulls back from the stimulus that it implemented for the economy amid the Great Recession. But if rates rise more quickly than expected, it could upset markets.
The key concern is that the Fed will respond to higher inflation by raising its key interest rate more quickly than expected. The government’s latest job and wage data stoked those concerns Friday.
U.S. employers added a robust 200,000 jobs in January, slightly above market expectations for an 185,000 increase. Meanwhile wages rose sharply, suggesting employers are competing more fiercely for workers. The figures point to an economy on strong footing even in its ninth year of expansion, fuelled by global economic growth and healthy consumer spending at home.
That’s good news for Main Street USA, but not for Wall Street. Investors fear the pickup in hourly wages, along with a recent uptick in inflation, may make it more likely that the Fed will raise short- term interest rates more quickly in the coming months. Some economists were predicting Friday that the central bank will raise its benchmark rate four times this year, rather than the three times most previously expected.
The market slide may have been overdue, particularly after the strong start for stocks this year where the S&P 500 had its best January in two decades.
PACE OF RATE INCREASES MORE IMPORTANT THAN THE LEVEL.