Skip to main content

Luke KawaFred Lum/The Globe and Mail

While Tuesday's sell-off on Bay Street wasn't nearly as bad as what investors endured the day before – the largest decline since April 2013 and the tenth-worst session since the start of 2010 – the laggards from today's triple-digit loss are quite mystifying in light of the macroeconomic backdrop.

On a day in which the front-month futures contract for West Texas Intermediate dipped below $48 (U.S.) per barrel, it wasn't energy stocks leading the way down. Rather, among the capped sector indexes, consumer staples performed the worst. This is a defensive sector that typically weathers periods of market turbulence better than most, and, what's more, is considered to be among the prime beneficiaries of lower oil prices. Air Canada, which counts jet fuel as its biggest operating expense, also had its wings clipped, down roughly 3 per cent on the day.

Bespoke Investment Group cited "panic selling" in equities prior to the lunch hour, a nod to the broad-based and somewhat indiscriminate nature of Tuesday's tumble.

The early story of 2015 has been risk-off: stocks down, oil down, and bonds up.

Gold, on the other hand, made headlines for reasons that had nothing to do with the performance of the Canadian men's junior hockey team. The long-battered S&P/TSX Global Gold Index was the best performing segment on Bay Street, surging by 6 per cent. While gold is often thought of as a hedge against inflation, it's actually low real interest rates that reduce the opportunity cost of holding bullion versus bonds and have historically helped support the shiny metal. Gold was hovering around $1,185 U.S. per ounce when the calendar flipped over to 2015, and has proceeded to gain about $35 since.

Heading into 2015, valuations and optimism surrounding American markets were at cycle highs, with the trailing price-to-earnings ratio on the S&P 500 north of 18 and all of the strategists tracked by Bloomberg calling for the S&P 500 to advance this year. But data released so far this year south of the border has consistently come in on the soft side, raising concerns about America's ability to drive global economic growth, and, in turn, the prospects for U.S. equities. The subdued outlook for global growth outside of the United States has been well-telegraphed. Throw in rising worries about a Greek exit from the European Union, and it isn't difficult to see why safe haven assets have been getting a bid.

It's unwise to read too much into a small sample size. But if there's a theme to be found early in 2015, it's this: at the first sign of question marks regarding the United States, investors are all too willing to gobble up fixed income at ultra-low interest rates – a signal that the number of global investment opportunities is perceived to be quite small.