As another frantic selloff sent stocks to new depths yesterday, one question burned the minds, phone lines and trading desks of investors big and small: Where does it end?
The frustrating answer, even with stock valuations cheaper than we've seen in decades, is that no one has a clue.
"We are in rarefied air here," said Myles Zyblock, chief equity strategist at RBC Dominion Securities in Toronto. "You just don't have any precedents."
Yesterday's rout has left market watchers at a loss, after the S&P/TSX composite nosedived 9 per cent - the steepest one-day decline since the market crash of October, 1987 - to close below 8,000 for the first time in five years. The S&P 500 closed at 11-year lows, after dropping below its lows of the last bear market in September, 2002 - a move that set off a bout of furious late-day selling.
The relentless declines of the past three months have reduced stock values, by many measures, to levels that many traders have never seen. The price-to-earnings ratio for the S&P/TSX index is below eight times, based on 2008 earnings estimates, while the annual dividend yield alone for the index is 4.8 per cent, almost 1.5 percentage points above the Canadian 10-year bond.
But the market is running on fear, not fundamentals.
"It's almost like people are giving up in terms of wanting to own stocks. Valuations are compelling but nobody cares any more," said Todd Johnson, money manager with BCV Asset Management in Winnipeg.
"Valuation only provides support [to markets]when investors believe they have a reasonably clear idea of at least one of the variables in there. But right now, no one's willing to bet on what earnings will be or what valuations might be. So you have absolutely no support for any market level," said George Vasic, chief economist and strategist at UBS Securities Canada Inc.
"The idea that there are floors underneath the market has rapidly evaporated. "There really is only one true floor - and we don't want to discuss that."
Traders said they're seeing selling at any price, as investors of all sizes rapidly liquidate holdings to reduce their risk exposure, especially on any holdings financed by debt.
"There's a buyers' strike out there," said Som Seif, president of fund manager Claymore Investments Inc. "No one wants to have risk on their books."
Yet one of Canada's most prominent investors, Fairfax Financial Holdings Ltd. chairman Prem Watsa, yesterday disclosed that the firm removed its hedge on its equity portfolio investments - essentially ending its bet that the Canadian and U.S. markets will decline further.
"While we believe the recession may be long and deep, we also believe that stock prices may have already discounted the worst of the economic decline," he said in a statement. "As value investors, we are finding an incredible number of investment opportunities across the world."
"That said, in the short term we recognize that stock markets can continue to fall significantly."
That was certainly evident yesterday as Canadian markets were sideswiped by a flood of liquidation and a flight to safety.
Both professional money managers and retail investors cashed out amid swelling uncertainty over the global economy and the fate of the auto sector.
That drove prices for many key Canadian commodities lower, including oil, which fell below $50 (U.S.) a barrel for the first time in 3½ years, and sent the Canadian dollar down to a new four-year low just above 77 cents (U.S.). as money flowed into the safety of gold and U.S. government bonds.
Meanwhile, Canada's financial sector - which had been considered a source of strength due to its relative health among the world's financial stocks - fell from grace after Toronto-Dominion Bank revealed a $350-million (Canadian) loss from credit trading in the latest quarter.
The TSX financial sector - the biggest sector on the Toronto Stock Exchange, representing almost one-third of the market - lost 12.2 per cent yesterday. The next-biggest sector, energy, slumped 14.5 per cent, while base-metal mining stocks dropped 12.1 per cent.
"It feels like this is the final nail in the coffin as far as investor sentiment in Canada is concerned," said Elvis Picardo, investment strategist at Global Securities in Vancouver.
"The downside has been so dramatic and so swift, you don't know where it's going to stop."
In the U.S. market, meanwhile, with iconic Wall Street brokerage houses such as Lehman Brothers and Bear Stearns already destroyed, there was a growing sense that no failure is too large to contemplate.
Traders are openly discussing the notion of Citigroup going out of business - the global bank's stock sank 26 per cent yesterday after falling 23 per cent on Wednesday - along with the seeming inevitability of bankruptcy filings from the Detroit auto makers.
Big-picture types warn that it's nearly impossible to pick a point to re-enter stocks, and not worth trying.
Merrill Lynch's chief investment strategist Richard Bernstein published a report yesterday that opened with a view that "history shows well that, contrary to popular belief, being late relative to a market bottom is usually a preferable strategy to being early."
And what should investors do while waiting for better times?
Hold old-fashioned U.S. government bonds, according to Mr. Bernstein: "We remain perplexed by investors' wariness of Treasuries despite the fact that they are about the world's best performing asset this year."
Big and bad
S&P/TSX composite index
Yesterday's close 7,724.76, down 765.80
Blue chips have been no place
to hide from this year's crash
(year to date).
Big drops on the TSX
Oct. 19, 1987: 11%
Black Monday was the culmination of a sharp, sudden reversal of fortune on markets around the world that followed two years of boisterous buying. Interest rates were rising sharply, and news of a big U.S. monthly trade deficit sparked panicked selling that would shave $500-billion off the Canadian market in one day. It took 23 months to recoup the losses.
Nov. 20, 2008: 9.02%
Fears of spreading contagion on the balance sheets of Canadian banks partnered with a rapidly plunging price of oil to drag the S&P/TSX to its second-worse percentage loss in history.
Monday, Oct. 27, 2008: 8.12%
Investors succumbed to two months of gloom during the final minutes of trading in a frenzied selloff of stocks across the board. Driving the continuing collapse were severe slides in the price of oil and other commodities, along with the near-implosion of the U.S. financial sector and its reverberations in Canada.
Oct. 26, 1987: 7.56%
Attempts by governments and the brokerage industry to shore up confidence in the international financial markets after Black Monday fell on deaf ears as share prices followed up with another steep decline.
Oct. 16, 2001: 6.91%
Nortel Networks almost single-handedly took the index down, as the heaviest weighted stock fell 32.8 per cent in a single session after the company shocked the Street with a lowered growth forecast and a massive cut in its work force. It started the day with a 20 per cent weighting, and ended at 12.5 per cent.