A swoon in the prices of gold and oil sent the Toronto Stock Exchange into a tailspin Wednesday, wiping out all the gains on the market so far this year, on concern that the global upturn is slowing.
Investors are worried that a lethargic recovery will hit the Canadian market particularly hard because of its heavy dependence on economically sensitive mining and energy stocks.
While U.S. stocks have been hitting record highs in recent weeks, Canadian stocks have been among the world's weakest performers. The selloff on Wednesday, which knocked 260 points, or 2.1 per cent, off the S&P/TSX index, began from the opening bell as investors reacted to several disappointing economic indicators.
The price of West Texas intermediate oil sagged nearly 3 per cent, or $2.80 (U.S.) a barrel, to $94.39 in response to growth jitters, while gold continued to retreat and posted losses of around $18 to trade at $1,558 an ounce, its lowest level in nine months.
U.S. stocks also fell, but the decline south of the border was less severe than in Toronto. The Dow Jones industrial average lost 0.8 per cent, while the more broadly based S&P 500 dropped 1.1 per cent.
With U.S. stocks showing gains of nearly 10 per cent in the first quarter "a 1-per-cent pull back in a market that some people might view as being somewhat overbought is not surprising," said Peter Jackson, chief investment officer at Cumberland Private Wealth Management Inc., a Toronto-based money manager.
Traders were rattled before markets opened by a disappointing report on jobs growth in the U.S. private sector from ADP, a giant in payroll data processing. It reported payrolls expanded by only 158,000 in March, well below the consensus forecast of 200,000 and the slowest pace in five months. Economic data from Europe have also been downbeat recently, further dampening the mood of investors.
"The ADP report was quite soft and will cast some doubts about Friday's crucial non-farm payrolls [report] for March," commented Krishen Rangasamy, senior economist at National Bank, referring to the U.S. government's release of its widely watched monthly labour statistics.
The lacklustre performance of the Canadian market, which is now essentially flat so far this year, is vindicating strategists who have advocated that investors shift some funds to the U.S.
Ed Sollbach, an analyst at Desjardins Securities, said in a note to clients that the TSX has now lagged the S&P 500 for the last 28 months, its longest period of underperformance since the late 1990s. Over that time, U.S. stocks have gained 21-per-cent more than Canadian equities.
According to Mr. Sollbach, the weakness in Canada is widespread. Canadian energy stocks, for instance, have suffered because of poor prices on heavy oil from Alberta and the lack of pipeline capacity.
Even Canadian banks are losing some of their former swagger, as U.S. banks recover from the housing collapse and their shares march higher. "With the recovery in U.S. house prices over the last year, TSX financials have also underperformed for the longest period since the 1990s," Mr. Sollbach says.
While the U.S. market has reached new records, the TSX is still about 16-per-cent below its record peak reached in 2008 before the global financial crash.
Many market analysts are on the watch for signs that the downturn may be close to ending. Steep downturns often end when skittish sellers throw in the towel, exhausting their capacity to dump stocks and depress prices.
"It just looks like people have given up on the resource and materials sectors here. There is a bit of capitulation going on. That's what we see," Cumberland's Mr. Jackson said.