Canada’s major stock index rebounded somewhat from sharp losses Tuesday, catching up to other equity markets around the world in what many analysts are labeling a bout of volatility.
The S&P/TSX fell 542 points to start trading on Tuesday, a decline of 2.44 per cent, bringing Canada’s benchmark index to its lowest levels in a month. It had recovered much of those losses through the morning, down 1.12 per cent or nearly 250 points to end the day just under 22,000 points. That’s still up 5.3 per cent from the start of 2024.
The volatile day came after the index fell nearly 500 points in trading on a tumultuous Friday.
Markets in Canada were closed for a holiday on Monday, meaning Canadian stocks were just catching up to a global selloff that began last week and continued to rock markets worldwide.
Weak jobs figures released in the United States on Friday stoked trading woes amid renewed fears of a recession hitting the economy.
Benjamin Reitzes, BMO’s director of Canadian rates and macro strategist, told Global News on Tuesday that signs of weakness in the U.S. usually creep north of the border, too.
“Where the U.S. goes, Canada goes as well,” he said. “The reality is for Canada that we’re already in a pretty weak state as it is, the unemployment rate here is up more than a percentage point from a year ago, economic growth has been consistently weak for over a year.”
Wall Street’s main indices rose in trading on Tuesday as investors looked for bargains after a rout in the previous session, while dovish rate commentary from Federal Reserve officials also lifted the mood.
Stocks closed higher on Wall Street as calm returned to the market a day after its biggest pullback in almost two years.
The S&P 500 rose one per cent Tuesday, breaking a brutal three-day losing streak. The Dow Jones Industrial Average climbed 0.8 per cent and the Nasdaq composite added one per cent. Strong profit reports from Uber and other companies helped support the market.
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The vast majority of stocks climbed in a mirror opposite of the day before, when the unraveling of some popular trades and worries about the U.S. economy wracked markets. Treasury yields climbed, clawing back some of their sharp drops since April.
The Nikkei stock index soared on Tuesday in a relief rally after plummeting 12.4 per cent on Monday, its biggest percentage drop since the 1987 Black Monday crash. It ended Tuesday’s trade up 10.2 per cent at 34,675.46.
Tech stocks were hit particularly hard in the selloff, but largely rebounded as well on Tuesday.
A set of underwhelming profit reports recently, kicked off by Tesla and Alphabet, added to the pessimism and dragged Big Tech stocks lower. Nvidia dropped nearly 19 per cent from the start of July through Monday on such concerns, but it rose 3.78 per cent Tuesday.
Apple was an exception, slipping roughly one per cent and continuing a slide that began as Warren Buffett’s Berkshire Hathaway cut its stake in the iPhone maker in half.
How should investors react?
Craig Basinger, chief market strategist at Purpose Investments, told the Canadian Press that he doesn’t advise investors to “overreact” to the volatility, attributing it largely to technical factors rather than economic disruption.
“This is, I think, a bit of a mechanical unwinding of a really big trade, which has caused a huge spike in volatility. But for most people, I wouldn’t be recommending abruptly changing positioning or portfolio construction,” Basinger said.
He said last week’s interest rate hike by the Bank of Japan affected what are called “carry trades.” The term refers to when investors borrow money in a market with low interest rates (in this case Japan) and invest those funds in a market with high interest rates that will yield a better return (in this case, the U.S.).
That carry trade has been profitable for the last couple of years, but an interest rate hike in Japan combined with softer U.S. economic data raising the likelihood of an aggressive rate cut by the Federal Reserve has changed that.
“I think there’s just been a pretty big stampede towards the exit for this carry trade that’s been very popular of the last couple of years, and that is what exacerbated a lot of the market moves and weird nuances that were going on yesterday,” Basinger said.
Now the million-dollar question is whether Monday’s market panic is over, or whether there is still more money that needs to come out, he said.
“If this is a mechanical situation where it’s an unwinding of a trade, then that will limit how much it can actually spread,” he said.
“I think you could possibly get some normalcy back in the market. The only risk, of course, is that these were really big moves — there could be some institutions that are sort of further offside now or in greater trouble.”
Reitzes said markets can react a bit more strongly to one or two downbeat data points during the summer, but he believes the recent market volatility does not portend economic ruin for the U.S. or Canada.
Monetary policymakers will react in turn to recent developments, Reitzes noted, with the Bank of Canada already in an easing cycle and many forecasters predicting interest rate cuts could begin in September for the U.S. Federal Reserve.
Weak economic data on both sides of the border has markets advancing their bets for interest rate cuts this year and next — in Canada, Reitzes foresees an additional 75 basis points of rate cuts in 2024 to drop the Bank of Canada’s policy rate to 3.75 per cent by year’s end.
Lower policy rates on both sides of the border will take the pressure off the North American economies and equity markets should find some relief when borrowing costs do drop, he said. Further rumblings of a recession in the U.S. could cause more instability, but Reitzes said it’s too early to jump to conclusions about a steep downturn.
“Unless we see continued bad data or softer data out of the U.S., things are probably going to stabilize a little bit from here,” he said.
“The recent volatility is a reason for some caution. But it is not at all time to panic at this point.”
But Barry Bannister, chief equity strategist at Stifel, is warning more drops could be ahead because of a slowing U.S. economy and sticky inflation. He’s forecasting both will be worse in the second half of this year than what much of Wall Street expects, while saying a measure of how expensive the U.S. stock market is still looks “frothy” when compared with bond yields and other financial conditions.
The stock market’s “dip is not a blip,” he warned in a report, and called it “too soon to jump back in.”
He had been predicting a coming “correction” in U.S. stock prices for a while, including an acknowledgement in July that his initial call was early. That was a couple days before the S&P 500 set its latest all-time high and then began sinking.
— with files from Reuters, the Associated Press and the Canadian Press
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