Growing concerns that China's economy is faltering triggered panic in financial markets Monday, engulfing Canada and the U.S. in an escalating global stock selloff.
A crash in Chinese stocks, combined with discouraging economic readings, is shaking faith in what has served as the world's economic saviour since the global financial crisis.
U.S. and Canadian stocks sold off so quickly in response on Monday morning that hundreds of trading halts were imposed as some of the world's biggest stocks succumbed to indiscriminate selling pressure.
"Stock markets are falling apart at the seams," Jasper Lawler, market analyst at CMC Markets UK, said in a note. "There was one point today when there just seemed to be no buyers and markets just went into free fall."
Even before the opening bell on Wall Street, the day was dubbed by financial media as Black Monday, a name that evokes episodes of monumental market havoc, such as Monday, Oct. 19, 1987, when the Dow Jones Industrial Average lost 22.6 per cent of its value – the largest one-day crash in history.
This Monday fell somewhat short of its billing, as the Dow, which measures a basket of 30 large U.S. stocks, fell by a comparatively paltry 3.6 per cent. The broader S&P 500 index, which includes 500 of the largest publicly traded U.S. companies, fell by 3.9 per cent, landing that benchmark in correction territory, which is defined as a drop of at least 10 per cent from recent highs.
It's the first such correction since 2011, bringing an official end to a period of extraordinary calm in U.S. stocks. The past four years notwithstanding, corrections are relatively common phenomena, however, and this pullback need not amount to the end of one of history's greatest bull markets – a term that simply means stock prices are rising.
"We're long overdue for a correction, but we still think we're in a bull market," said Gerald Connor, CEO of Cumberland Private Wealth Management in Toronto.
A bear market, or one that is trending down, on the other hand, is typically accompanied by at least one of two conditions – a recession, or the tightening of monetary conditions by central banks, Mr. Connor said. "I've never seen a bear without one of those two."
The likelihood of the U.S. Federal Reserve raising rates this year amid the global turmoil looks increasingly slim.
And while the pace of growth in the U.S. isn't exactly torrid, its economy is slowly improving and does not appear to be at risk of sinking into recession, even if trade might be impaired by a Chinese slowdown, Mr. Connor said.
China's rate of expansion has fallen to its lowest level in almost 25 years, and markets are losing confidence in the government's claim that it's on track to post 7-per-cent growth this year.
Investor money is fleeing the country and Chinese stocks have collapsed. The Shanghai composite index has lost nearly 40 per cent of its value since June.
The 8.5-per-cent drop in the benchmark on Monday – the largest since 2007 – consumed investors everywhere.
Canadian stocks sunk to October, 2013, levels as the S&P/TSX composite index extended its losses to 15.5 per cent over the past four months. The Dow opened the day on a staggering 1,000-point plunge, and U.S. stock losses swiftly surpassed the $1-trillion mark (U.S.), as pillars of the market such as Apple and General Electric were struck by double-digit declines almost instantaneously.
"The reason this can happen is because these are machines doing the trading," said Ari Shiff, president of Inflection Management in Vancouver. "Everybody is still on holiday in the Hamptons."
He expects many travel plans might change with the return of volatility to a level not seen since the European debt crisis flared up four years ago. The CBOE volatility index, also known as the "fear index," topped the 40 mark on Monday for the first time since 2011.
And the market could have more trading days in store like the one just passed, Mr. Shiff said. "This is reality reasserting itself."