What the stock market correction has left in its wake

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The global stock market retreat took a breather on Wednesday as a day of gains gave some relief to investors fixated on the latest outburst of volatility.

While stocks were well off their intraday highs by Wednesday’s close, the S&P 500 gained 0.3 per cent for the day, while the S&P/TSX Composite Index – thanks largely to a bounce in energy stocks – rose 1.4 per cent. That only put a slight dent in the losses incurred over a turbulent fall season, which has been dominated by concerns about global growth, interest rates, stock valuations and – in Canada in particular – the lack of pipeline capacity.

The on-again-off-again global sell-off has seen steep losses in technology, consumer and energy sectors lead the way for broad stock market declines.

From peak to trough, the S&P 500 index dropped by 9.9 per cent over the past two months, avoiding correction territory by a hair, at least for now. The S&P/TSX Composite Index, however, surpassed the correction threshold last month with a top-to-bottom decline of 11.1 per cent.

Going into what is historically the strongest period of the year for both U.S. and Canadian stocks, we survey the damage of the correction so far.

Low-energy sector

Several different forces conspired to drag Canadian energy stocks down to their lowest point since the global crash in oil prices started to fade 2½ years ago.

A bottleneck in the pipeline network – made worse by the lack of progress in building new pipelines – combined with record levels of Canadian production, resulted in steep discounts on Alberta crude.

Then the world outlook for oil worsened. Declining global growth in the third quarter weighed on energy demand, while surging output has seen an oversupply return to the oil market. Oil traders, meanwhile, have amplified the slide in crude, National Bank economist Krishen Rangasamy wrote. “Speculators are reducing net long positions on oil at the fastest pace on record.”

Domestic and external pressures combined to drag the price of Western Canadian Select down to as low as US$13.46 a barrel.

Some large Canadian energy names sold off deeply in the process. After the sector tipped over in mid-July, Encana Corp.’s shares declined by 46 per cent, Cenovus Energy Inc. by 29 per cent, Canadian Natural Resources Ltd. by 28 per cent and Suncor Energy Inc. by 22 per cent.

Peak iPhone?

The latest red flag suggesting demand for iPhones is waning came on Wednesday amid rumours that smartphone assembler Foxconn was planning deep cost cuts.

After peaking in early October, Apple Inc.’s stock entered bear market territory with a decline of 23 per cent, nearly wiping out the stock’s gains on the year. The rest of the FAANG cohort of high-flying tech stocks have been subject to dizzying sell-offs of their own.

Beyond the FAANGs, the semi-conductor group as a whole has been hit by negative investor sentiment, as well as a glut in chip inventories. But the industry appears to have worked through excess supplies, while U.S. chip stocks now trade at heavy discounts to the software space, Martin Roberge, a portfolio strategist at Canaccord Genuity, said in a note. “Such discounts were last seen in 1996 and coincided with the end of an underperformance phase for chip stocks,” he wrote.

Big banks hung in there

While each of the six largest Canadian bank stocks declined over the course of the TSX correction, the group fared better than the market with an average decline of about 7 per cent.

Earnings season for the banks kicks off on Tuesday when Bank of Nova Scotia is scheduled to report on its fourth-quarter performance. It is expected to be another quarter of double-digit bank profit growth.

But several technical indicators point to a cautious approach at the banks, said Javed Mirza, an analyst at Canaccord Genuity. “The recent price action suggests further near-term weakness is in store.”