U.S. stocks, which hit record highs as recently as September even as their global peers were struggling over concerns about rising trade barriers and slow economic activity, have joined the rest of the world – and not in a good way.
The S&P 500 fell briefly into official correction territory during trading activity on Friday, defined as a cumulative decline of 10 per cent or more from a recent high. This latest dip, at the end of a volatile week, pushed the broad index under water for the year and silenced the one engine that had given investors faith in the bull market.
Now, the U.S. market is exhibiting eerie similarities to much of the rest of the world, which is mired in its own corrections.
In Europe, Germany’s DAX and the United Kingdom’s FTSE 100 have been under water throughout most of 2018, and are down 17 per cent and 12 per cent, respectively, from their recent highs. China’s CSI 300 is now down nearly 28 per cent for the year.
And Canada’s S&P/TSX Composite Index is down 10 per cent since July and is down more than 8 per cent in 2018.
“Canadian equities can only wish for flat this year. Despite missing out on the U.S. stock rally earlier this year, the TSX has fully participated in the latest sell-off,” Douglas Porter, chief economist at BMO Nesbitt Burns, said in a note.
He added: “The extraordinary flat fact here is that the TSX is now below levels reached more than a decade ago in the summer of 2008.”
The S&P 500 is nowhere near to generating such a dismal statistic (it is up about 90 per cent over the same period). But this week’s downturn, which puts the index on track for its worst month since 2010, suggests that the U.S. stock market is no longer immune to concerns that are weighing on much of the rest of the world.
The S&P 500 fell as much as 77.4 points or 2.9 per cent early on Friday, pushing it down 10.3 per cent since September. It recovered some lost ground and closed at 2,658.69, down 46.88 points or 1.7 per cent. The S&P/TSX Composite Index closed at 14,888.26, down 35.82 points or 0.2 per cent.
“Fears of a global slowdown and the ramifications of slower growth, particularly in China, have taken hold,” Lori Calvasina, head of U.S. equity strategy at RBC Dominion Securities, said in a note this week.
Profit gains during the third-quarter reporting season have been strong: Earnings for companies in the S&P 500 are on track to rise more than 25 per cent from the third quarter of 2017, according to the latest I/B/E/S data from Refinitiv.
But analysts and investors are turning their attention to what companies are saying about underlying demand, given that declining Chinese economic growth, falling copper prices and uneven U.S. housing data are pointing to potential problems.
“In this week’s earnings calls, sell-side analysts have been pressing companies on the health of the underlying economies and the demand backdrop of the U.S. and China. Even though most companies are pointing to a healthy/solid underlying backdrop for demand, investors have fixated on the few pointing to a tougher environment,” Ms. Calvasina said, pointing to Caterpillar Inc., 3M Co. and Fastenal Co.
Some observers are even raising concerns over U.S. economic growth, which has been leading the developed world. U.S. gross domestic product rose 3.5 per cent in the third quarter, at an annualized pace, an unusually strong performance that exceeded expectations when the report was released on Friday.
But economists at Capital Economics said that the growth was fuelled partly by government spending. Looking more closely at the third-quarter performance, they saw problems in areas that are vulnerable to rising interest rates, such as equipment and residential investment.
“Fiscal stimulus is keeping headline GDP growth strong for now,” Michael Pearce, senior U.S. economist at Capital Economics, said in a note.
“But the third-quarter GDP figures add weight to our view that the cumulative tightening in monetary conditions already seen is beginning to bite. Next year, as the boost from fiscal stimulus is fading and the lagged impact of higher interest rates begins to weigh more heavily, we expect GDP growth to slow below its 2-per-cent potential pace,” Mr. Pearce said.
David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates, also saw little to cheer in the GDP report. He argued that much of the apparent growth came from the temporary effect of companies stockpiling products ahead of U.S. tariffs on Chinese imports.
“In other words, the U.S. economy is far weaker than is generally recognized, though Mr. Market seems to be catching on,” Mr. Rosenberg said in a note.