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Traders work on the floor of the New York Stock Exchange on Oct. 23, 2018.BRENDAN MCDERMID/Reuters

Investors are growing increasingly concerned about the global economy as trade wars and rising borrowing costs begin to crimp growth.

China, the world’s second-largest economy, is one point of anxiety. Its economic growth slowed to 6.5 per cent in the third quarter, the slowest pace in nearly a decade. China and the United States haven’t resolved their trade dispute, which is interfering with supply chains.

In Italy, rising bond yields are putting pressure on the country’s banking system, which has the potential to spill into the euro zone.

Even in the United States, the growth engine for the global economy in recent years, disappointing homebuilding activity and weaker auto sales suggest that higher interest rates are starting to bite.

Among cyclical sectors, which tend to rise and fall with the economy, U.S. homebuilding stocks have fallen 33 per cent this year and auto parts stocks have fallen 15 per cent. Canadian energy stocks are down 14 per cent since July.

“In light of our forecasts that China’s economy will continue to lose momentum, and that the U.S. economy will slow sharply in 2019, we expect [cyclical sectors] to continue to underperform. This would be consistent with what has happened in previous economic downturns,” Oliver Jones, a markets economist at Capital Economics, said in a note.

Global stocks were again volatile on Tuesday, underscoring a pattern that has defined the market throughout much of the year as investors recoil from risk.

The S&P 500 fell as much as 64 points, or 2.3 per cent – marking the index’s fourth decline of more than 1 per cent in the past 10 trading sessions – before recovering. It closed at 2,740.69, down 0.6 per cent. The index is below its 200-day moving average, an ugly technical threshold that challenges the bull market.

Canada’s S&P/TSX Composite Index fell 127.53 points, or 0.8 per cent, to 15,285.17. Reflecting the breadth of the sell-off, European stocks fell 1.6 per cent and Japan’s Nikkei 225 fell 2.7 per cent in overnight trading.

The moves highlight how skittish equity investors have become, even as U.S. unemployment sits at a 50-year low and third-quarter corporate profits for companies in the S&P 500 are on track to rise about 22 per cent over last year.

The problems could blow over. But investors appear to be nervous.

Bellwethers are signalling danger ahead

Among companies in the S&P 500 that have reported their third-quarter financial results, more than 79 per cent of companies have delivered profit growth that has beaten analysts’ expectations, according to I/B/E/S data from Refinitiv. That’s good. But the amount by which companies are beating estimates is shrinking from previous quarters.

Also, some economically sensitive companies that are considered bellwethers for their ability to detect deteriorating economic conditions are standing out with disappointing results and particularly rocky share prices.

On Tuesday, Caterpillar Inc. shares fell 7.5 per cent after the heavy-equipment maker reported an 18-per-cent increase in its third-quarter sales. That marked a deceleration from 25-per-cent growth in the third quarter of last year.

Perhaps more worrisome, Caterpillar’s order growth is falling and the company’s year-end forecasts imply that profit growth is also expected to decline in the fourth quarter – suggesting that buying interest among global construction firms and miners may have peaked.

Sales growth is slowing

While corporate profits have been given a boost from recent U.S. tax cuts, sales present a far less upbeat picture that may suggest declining economic activity.

According to Bloomberg, revenues among companies in the S&P 500 are up 7.7 per cent in the third quarter, down from 9.3-per-cent growth in the second quarter and marking the slowest pace of growth so far this year.

International Business Machines Corp., which reported its results last week, showed a decline of 2.1 per cent in its quarterly revenue, which missed expectations. The shares slumped more than 7 per cent last Wednesday, amid concerns about slowing demand for its mainframe computers and data-storage systems.

Safety in bonds and gold

Tuesday’s downturn coincided with gains in gold and bond prices, suggesting that investors are seeking havens from stock-market turbulence. If this trend persists, there could be a more overt rotation away from some of the riskier areas of the market, such as technology stocks and small-cap stocks, and into safer bets.

Gold rose about US$9 to US$1,233.50 an ounce, a three-month high. The gain lifted Canadian gold mining stocks. Barrick Gold Corp. rose 1.6 per cent.

The yield on the 10-year U.S. Treasury bond fell to 3.17 per cent as the price of bonds rose. Observers have been keeping a wary eye on bond yields, which hit a seven-year high in early October amid inflationary pressures and rate hikes by the Federal Reserve.

The higher yield increases the attractiveness of bonds relative to stocks, and could be encouraging large institutional investors to divert more money into fixed income.

As for riskier stocks, many are being pummelled. The Russell 2000, a small-cap index, is down 12.1 per cent since the start of September, suggesting investors are concerned that smaller stocks will bear the brunt of an economic downturn.

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