Canadian stocks hit a record high six weeks ago, but have been on a downhill run ever since as nervous investors act on growing worries about deteriorating global conditions and their debilitating effect on demand for Canada's energy and other resources.
When they returned on Tuesday from the Thanksgiving holiday, traders drove down the benchmark Canadian index 190.7 points, or 1.3 per cent, to 14,036.68. The losses mean the Toronto stock market has now fallen 10.4 per cent since the start of September. Crossing the 10-per-cent threshold signals a market correction and puts the TSX halfway down the path to a full-fledged bear market. This is a troubling milestone, because if stocks continue their slide, it will put a severe dent in the value of individual investments as well as the mutual and pension funds that Canadians count on for retirement.
The list of global stresses is long, including a slowdown in China, a dramatic weakening of the once strong German economy, deepening woes elsewhere in Europe, increased strife in the Middle East, and the spreading Ebola scare. And they do not bode well for Canada, because they would force it to become more reliant on the United States, the one major economy still expanding.
If world energy prices keep dropping from weaker demand and a global glut caused partly by a surge in U.S. production that has sharply reduced imports to the United States, the effects will be felt not only in Alberta but across the Canadian economy.
Producers, bankers and investors will turn more cautious and could put their money elsewhere, delaying large resource and infrastructure projects not yet under way. This would hit manufacturers of equipment and materials, as well as engineering, construction and service companies. If the U.S. government follows the advice of its oil experts and allows the export of its burgeoning supplies of crude, that would put even more pressure on a suddenly vulnerable Canadian energy sector.
The cheaper loonie that stems directly from the global resource price squeeze would make Canadian manufacturing more competitive, but it could not replace the crucial growth engine that energy has become.
Energy stocks have plunged nearly 19 per cent since the end of August as the price of crude oil has tumbled to its lowest levels in more than two years on fading optimism for the global economy.
Economies in the euro zone are already shrinking. Germany is poised on the brink of recession after a rapid decline triggered by a plunge in exports and industrial output. Japan's economy is also faltering, as business and consumer spending slows, negating much of the early benefits of bold fiscal and monetary reforms. The problems of both export-driven economies have been exacerbated by slower Chinese demand for raw materials and manufactured goods, which is also taking a toll on energy and metals producers such as Canada, Australia and Brazil. All are hyper-sensitive to global price shifts.
Reduced Chinese demand has cooled commodity prices, said Daniel Yergin, vice-chairman of research firm IHS. "There was a notion that China would just consume resources at such a high rate, and that held true for several years. Right now, it's a China chill that's blowing across the global economy."
Resource producers have exerted the biggest drag on the Toronto stock market over the past month, causing significant pain to investors, given the heavy exposure to energy and mining companies. Together, these account for about half of the S&P/TSX composite index.
"I think people want to reduce exposure at any cost," said Charles Marleau, president of Montreal-based Palos Management. "They're selling companies with very strong balance sheets, great management teams and great assets – it doesn't matter."
In New York, oil fell to $81.84 (U.S.) a barrel, down $3.90.
The latest dip followed a report from the International Energy Agency, which lowered its forecast for global oil demand in 2014 by 200,000 barrels per day, citing lower expectations for economic growth amid a surge in output from oil producers.
The IEA noted that crude oil output from the Organization of Petroleum Exporting Countries rose to a 13-month high in September, due partly to rising exports from Libya, Iraq and Saudi Arabia.
OPEC is unlikely to impose production cuts in an effort to reverse the deterioration in prices, partly because of a belief that higher demand for oil in the winter and the stronger U.S. dollar (oil is priced in U.S. currency) will bolster the market.
However, investors do not accept this upbeat view. Energy stocks in the S&P/TSX index fell nearly 4 per cent on Tuesday for their worst one-day decline in more than two years. The group of stocks has fallen for 10 straight days.
Blame it on the sudden reappraisal of the global economy.
According to the latest monthly fund manager survey from Bank of America, released on Tuesday, a net 32 per cent of money managers expect the global economy to strengthen over the next 12 months, the lowest reading in two years and down 20 percentage points from the previous month.