As the cold wind of a U.S. economic slowdown threatens to become a bitter recessionary storm, investors returned from their holiday break yesterday and went on dumping shares.
The stock markets were stunned by a one-two punch. First came the horrifying results of the latest survey of the National Association of Purchasing Management showing U.S. manufacturing strength at its lowest level in almost a decade. Then investors were hit by a raft of brokerage downgrades of Internet infrastructure stocks based on expectations of weakening technology spending.
It was like "getting hit by a two-by-four right across the head," said David Rosenberg, Merrill Lynch Canada chief economist.
The U.S. dollar weakened against other currencies, including the Canadian dollar -- a bit of good news for thousands of snowbirds heading south for the winter. The loonie rose briefly above 67 cents (U.S.), ending the day at 66.96 cents for a gain of 0.3 cents from Friday. In the stock market, the selling was broad, spreading to some former darlings that have so far been spared the worst of investors' wrath. These included industrial titan General Electric Co., whose shares fell $4.19 (U.S.) to close at $43.75.
Shares in Internet infrastructure firms, once thought to be a bullet-proof way to make money from the headlong growth of the Web, were shot down by U.S. brokerage firm Robertson Stephens & Co., which warned they are vulnerable to a slump in technology investment.
"We believe the impact of this spending slowdown will be dramatic enough to impact even [data]storage and security vendors that we previously viewed as relatively immune," Robertson Stephens analyst Dane Lewis said in a report.
On the first trading day of the year, America's tech-heavy Nasdaq Stock Market composite index slumped 178.66 points or 7.2 per cent to close at 2,291.86. The Nasdaq, which dropped 39 per cent in 2000, is now at its lowest closing level since March 3, 1999.
The Toronto Stock Exchange's 300-share index lost 322.17 points or 3.6 per cent to end at 8,611.51. Heavyweight Nortel Networks Corp. fell $2.95 (Canadian) to close at $45.30 and Blackberry pager-maker Research in Motion dropped nearly a third of its value.
In Toronto, high-flying bank and life insurance shares, which had so far been impervious to the market's otherwise bearish sentiment, finally fell as the news of an economic slowdown sank in -- even though a weak economy means lower interest rates, which are good for banking profits.
Royal Bank of Canada shares, which gained 60 per cent last year as investors looked for safe havens, fell $2.85 to close at $48. Manulife Financial Corp., whose shares soared 155 per cent in 2000, dropped $1.20 to $45.75.
Still, there were a few bright spots in yesterday's markets as investors grabbed some more conservative stocks in hopes they can ride out ugly economic times.
Makers of big consumer products gained ground as market players continue to seek companies whose good are in constant demand. "Good things have been happening in those stocks for the last three or four months," said Richard Rooney, president of Toronto money manager Burgundy Asset Management.
Cigarette giant Philip Morris Cos. rose $2.19 (U.S.) to close at $46.19 on the New York Stock Exchange, up from less than $20 last January, after a Wall Street Journal piece referred to the stock's generous dividend yield of more than 4 per cent.
Shares in cereal maker Kellogg Co. rose 6 cents to close at $26.31 in New York while chewing gum seller William Wrigley Jr. Co. gained 25 cents to close at $96.06.
Gold shares also gained, with Barrick Gold Corp. rising 95 cents (Canadian) to close at $25.56 in Toronto, as a slumping U.S. greenback raised the possibility of higher gold prices in dollar terms. The U.S. dollar hit a six-month low against the euro.