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TORONTO – Global stock markets are being roiled by more volatility as investors remain fearful that signs of rising inflation and higher interest rates could bring an end to the bull market that has sent stocks to record high after record high in recent years.
Trading was choppy in the early going Tuesday, likely to be one of the most watched days on the markets in years.
In Toronto, the S&P/TSX composite index plunged in initial trading, and recovered slightly at 107 points down, or 0.70 per cent, to 15,227.79, in late morning trading.
The Canadian dollar was trading at 79.79 cents US, down from an average price of 80.11 cents US. The loonie has slipped 1.27 cents U.S. since Friday as jittery investors seek the U.S. greenback as a safe haven in times of distress.
Meanwhile, U.S. markets swung wildly after plunging at the start of trading and bouncing back.
The Dow was up 58.78 points, or 0.24 per cent, to 24,404. The Standard & Poor’s 500 index, a broader market barometer that many index funds track, was down 9.45 points, or 0.36 per cent, to 2,639. The Nasdaq composite was up 3.2 points, or 0.05 per cent, to 6,970.
While many market observers say a correction was expected after a decade-long bull run, the trigger that sparked the sudden downturn is thought to be U.S. figures released Friday that suggested long-anticipated wage growth has started to kick in, resulting in inflation and a greater potential for the U.S. Federal Reserve to raise interest rates.
An increase in interest rates pushes bond yields higher and makes such fixed-income investments more attractive and thus, bets on corporate earnings and dividends less attractive.
The Toronto Stock Exchange has experienced a longer seven day decline, but drops have not been as steep as in U.S. markets. It ended last week down four per cent before closing down another 1.7 per cent Monday as the downward pressure on markets around the world takes Canada’s largest exchange down with it.
While the TSX has seen a more gradual decline than U.S. markets, the continued selloff is an indication that after a long period of market stability, investors are getting re-acquainted with volatility, says Kash Pashootan, CEO and chief investment officer at First Avenue Investment Counsel Inc. in Toronto.
“Monday was the first taste of meaningful volatility that we’ve had in over six years and so investors were trying to figure out what to do and how to handle it.”
Since the TSX’s decline began in late January, it has wiped out all the gains made since September 2018, a loss of more than 11,00 points, or roughly 6.7 per cent.
The steep drops Friday and Monday erased the gains the Dow and S&P 500 made since the beginning of the year, but both remain higher over the past 12 months. The Dow is still up 20 per cent over that time, the S&P 500 15 per cent.
After the sharp losses over the past three days, the S&P 500 is down 8.5 per cent from the most recent record high it set on January 26. That’s less than the 10 per cent drop that is known on Wall Street as a “correction.”
Corrections are seen as entirely normal during bull markets, and even helpful in removing speculative froth and allowing new investors to buy into the market at lower prices. The last time the market had a correction was two years ago, which is seen as an uncommonly long time.
Despite the sea of red in global stock markets, there are hopes that the retreat won’t last long given that global economic growth has picked up and the financial system is more robust since the financial crisis.
“That is not to say that we won’t see further falls in coming days, but in an environment where growth is good and earnings are expected to rise globally, there are decent underpinnings,” said James Knightley, chief international economist at ING.
