Skip to main content

Globe and Mail business writer Jennifer Dowty, c. June 15, 2015. Credit: The Globe and MailThe Globe and Mail

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market.

The dreaded "R" word, recession, is on the tongues of several economists, spooking investors, and perpetuating negative investor sentiment. Investors are taking money out of the stock market, and moving into safe havens such as cash, bonds, and gold stocks.

There was no single news item that can be identified as the main cause for today's market sell-off. It's just another day with volatility with oil, once again, at the epicentre of the quake that is shaking the stock markets, along with fears about global growth, the Chinese economy and its depreciating currency.

The price of oil plunged below $30 (U.S.) a barrel this morning, which sparked a sell-off. Over the weekend, on the front cover of Barron's was the headline, "Here comes $20 oil." However, when you see major publications with negative oil headlines, the general rule is that the trade is predominately over. Much of the negativity may be nearly priced into oil, after all, the commodity price has declined over 50 per cent in the past nine months. However, that is not to say it is going to bounce back any time soon. Some traders are suggesting that the price of oil may retest the $26 level before stabilizing.

The sell-off in oil is having rippling effects beyond the oil patch and into financials with growing concerns about bankruptcies in the oil patch. This morning, Chesapeake Energy, the second-largest U.S. natural gas producer and 12th largest oil and natural gas liquids producer in the U.S., saw its shares decline more than 50 per cent at one point. Management issued a press release denying plans to file for bankruptcy. Worries about rising loan losses provisions and write-downs are causing investors to liquidate financial stocks. In the U.S., shares of investment firms, Goldman Sachs and Morgan Stanley are down 6 per cent and 7 per cent, respectively. In Canada, shares of the Royal Bank, TD Bank, and Scotiabank are all down 2 per cent.

However, it is not just oil and financial stocks that are under pressure, it is a broad based sell-off. The S&P/TSX composite index is down just under 2 per cent. Of the 240 stocks in the index, 79 per cent are in negative territory. Amongst the leading laggards, are some of 2015's top performers such as ProMetic Life Sciences, Kinaxis, and Enghouse Systems, each falling 7 per cent today. Investors are taking profits off the table.

Investors are flocking into safe-haven gold stocks. The top ten performers in the market today are all gold and silver stocks. The price of gold has caught a bid, spiking $38 today to just below $1,200 (U.S) with shares such as Yamana Gold, and Kinross Gold up 14 per cent, and 11 per cent.

So what should investors make of all of these losses? Well, in the near-term, later this week, U.S. Federal Reserve chair, Janet Yellen will be speaking. Indications from Ms. Yellen suggest the Federal Reserve will hold rates steady may help stabilize markets. Fed fund futures are currently pricing in just a 2-per-cent probability of a March hike, and a 6-per-cent probability of an increase in April.

The fourth-quarter earnings season is providing little support. According to a FactSet report, 63 per cent of companies in the S&P 500 index have reported fourth-quarter financial results. Earnings for the companies that have reported combined with forecasts for companies that have yet to report, have declined 3.8 per cent year-over-year, marking the third consecutive quarterly decline.

The VIX index, a common gauge used to measure fear the markets, is up but ever so slightly to 26 – nothing that would suggest capitulation or panic, which to me, suggests that there may be further downside before there is stabilization in the markets.

Sell stocks on strength and buy stocks on dips. Unfortunately, there may be more near-term pain in the markets, and certainly volatility. In terms of selling, investors may consider trimming gold stocks with a staggered approach as no-one knows when these stocks will peak. In terms of buying, investors may want to wait to see if we can get a few days of market stabilization before stepping in, once again, with a staggered approach.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe