WIPING IT AWAY
Dow Jones loses all it gained so far this year as other global stock markets also drop,
The rout in North American stock markets deepened Monday with the Dow Jones industrial average seesawing before tumbling 1,175.21 points to wipe out all of its 2018 gains. Toronto’s S&P/TSX composite sank deeper in the red as it shed 271.23 points on top of a 254.89-point drop Friday.
U.S. stocks fell the most in more than six years amid what some call a “healthy” market correction, although the White House insisted that U.S. economic fundamentals are strong and that a multi-year bull market remains in place. The blue-chip S&P 500 index dropped 4.1 per cent to turn lower on the year.
The sell-off “may not end any time soon,” said Win Thin, head of emerging-market currency strategy at Brown Brothers Harriman.
In Toronto, the S&P/TSX composite index fell to 15,334.81 Monday, a four-month low, pressured by a drop in financial and industrial shares as a sell-off in global markets weighed on investor sentiment.
The rise of U.S. benchmarks earlier this year contrasts with the performance of the S&P/TSX, which has lagged global bourses on increased consumer borrowing costs and the widening price discount for Canadian heavy oil versus Brent and west Texas light crude.
“I look at the broader factors that are driving this sell-off, and it’s really the pickup in interest rates that seems to be at the heart of the anxiety in the marketplace,” Craig Fehr, a Canadian markets strategist at Edward Jones in St. Louis, told The Canadian Press.
“And I look at a driver like that — and to the extent that interest rates are rising because economic optimism is picking up and that’s stoking some concerns about rising inflation — that for me is a healthy backbone for the fundamentals.”
“That means, in my opinion, this sell-off, while certainly aggressive, is probably likely to prove more temporary than to be a harbinger of an imminent bear market,” Fehr said. “Any pullback that’s driven by increasing optimism, that’s a buying opportunity.”
Much of the U.S. equity decline that included a more-than-660 point plunge Friday can be traced to investor fears over rising wages highlighted in U.S. employment data. That creates the prospect of strengthening inflation, which in turn could lead to increased borrowing costs for investors and busi- nesses. On Monday, the selling came without an obvious data point link.
“I think sentiment was a little too optimistic,” said financial blogger Brad McMillan, chief investment officer for Commonwealth Financial Network. “What was driving the market up in January? It wasn’t the fundamentals, as good as they were, and it was excessive confidence.”
The sentiment, however, flows largely from strong corporate earnings and gains in employment and wages, although some analysts say U.S. equity values have pushed into bubble territory.
Monday morning’s swearing in of Jerome Powell as chairperson of the Federal Reserve following the departure of Janet Yellen has also added to expectations of further U.S. interest rate hikes.
“Is there likely to be interest rates rising, growth rising and the potential for a recession over the next couple of years? Absolutely,” said James Norman, head of equity strategy at QS Investors. “That’s why I think volatility is quite likely to go back to more historical norms, and it’s normal and healthy to have a correction.”
“You understand how the stock market works, it has cycles and trends,” White House spokesperson Mercedes Schlapp said on Fox Business News Monday. “We are still in a bull market.”
That historic norm of stock market volatility may have been lost on U.S. investors who have watched the Dow rise to more than 26,000 points in late January from about 18,000 in early February 2015.
The Dow fell 4.6 per cent Monday to below 25,000, with all categories in negative territory. The Dow’s point loss would be its biggest of all time, though in percentage terms, its 5.6-per-cent decline wasn’t as big as its worst drop during the financial crisis, according to The Canadian Press. Bond yields, the basis for borrowing costs such as mortgage rates, have risen in recent weeks.
The main U.S. stock benchmarks posted especially robust returns at the start of the year on solid earnings and the prospect of rising GDP growth, thanks to the passage of the U.S. administration’s $1.5-trillion (U.S.) tax cut.
The Canadian dollar was 80.11 cents, down 0.67 of a cent from Friday while the U.S. dollar was at $1.2483 (Canadian), up 1.03 cents.