It's ugly out there. Ug-lee.
Or is it?
If you're an index investor whose sole focus is what the S&P/TSX did yesterday, then the 162-point face-plant on Canada's commodity top-heavy stock market certainly hurts. It hurts even more when combined with Tuesday's 472-point pratfall.
We'll do the math. Over the past two trading sessions, Canada's benchmark index has shed 4.6 per cent. If that doesn't qualify as ugly, it's hard to imagine what does.
But it's important to remember a couple of things: First, this is no ordinary stock market meltdown; and second, the S&P/TSX is no ordinary market index. Commodity-related stocks account for nearly half of the S&P/TSX composite's weighting, and they've been singled out for the lion's share of investors' punishment, even as other sectors have quietly chugged ahead.
Let's lift the hood of the market and see what's really going on.
Yesterday, Potash Corp. of Saskatchewan was the biggest drag on the index for the second day running. The fertilizer maker's stock plunged $8.17 or 4.7 per cent, accounting for nearly one-sixth of the index's loss, as the flight from commodities continued.
Gold and energy shares also plunged, dragged down by sliding commodity prices and by news that Ospraie Management LLC will close its flagship hedge fund after it sank 27 per cent in August on losses in energy and mining stocks.
Outside the commodity arena, however, plenty of stocks rose yesterday. The best performers were financials, as investors rotated out of resource stocks into banks, insurers and mutual fund companies, believing the worst of the credit crisis has passed. Royal Bank of Canada, Bank of Montreal, Power Financial, IGM Financial and Great-West Lifeco all surged more than 2 per cent.
Several real estate investment trusts also gained, buoyed by a dividend hike from RioCan, Canada's biggest REIT. Even paper and forest stocks were on a roll, with Cascades Inc. and Canfor Corp. both jumping more than 4 per cent.
In other words, this was far from an indiscriminate selloff in which investors tossed everything overboard. It was focused on a few sectors - energy, metals, fertilizers. That's the good news. The bad news is that, as the global economy slows, the commodity rout may not be over.
"Some investors feel that the pullback in commodity prices over the past couple of months is reminiscent of retrenchments earlier this year," Tobias Levkovich, Citigroup's chief equity strategist, said in a note to clients.
"However, a slew of weak economic readings abroad makes the current correction far more sinister and therefore it should not be lumped in as just a short-term blip that will revert back to strength within a month or two."
One ominous sign can be found in an obscure economic indicator called the Baltic Dry Index. The index, which measures ocean freight costs for raw materials such as coal, iron ore and grain, has tumbled for 11 days in a row, including a 5-per-cent drop yesterday that marked its biggest decline in three months.
Softening Chinese demand for iron ore and other commodities is thought to be a major reason for the slide in the index. A slowdown in China is hardly favourable for Canada's resource-rich stock market, but fortunately for investors, there's more to Canada's stock market than oil, gas and potash.
John Heinzl