The TSX tumbled 3.27 per cent last week, erasing all gains for the year to date and then some. The rot started early in the week with Chinese purchasing managers index data that failed to meet expectations, followed by other data showing slower than expected expansion in the American manufacturing and service sectors.
The weak was capped by reports showing the Canadian economy shed 55,000 jobs — all full time — in March.
"It’s not a surprise from that context to see the Toronto market underperforming," said Andrew Pyle, investment adviser at ScotiaMcLeod in Peterborough, Ont.
"I think it’s surprising for people to see the extent of the underperformance (where) you can wipe out the progress that you’ve made for the entire year."
And in the U.S., the economy only managed to crank out 88,000 jobs last month amid reduced expectations after payroll firm ADP had delivered a worse than expected assessment of private sector job creation.
"It was very discouraging and many people were caught off guard with how bad it was," said John Stephenson, portfolio manager at First Asset Funds Inc.
The report also indicated that a non-stop rally on American markets that took the benchmark S&P 500 up more than 10 per cent since the first of the year is due for a pause.
And that could come as a bit of a relief to traders worried about the pace of the strong rally on American markets, based on a steady run of positive economic news — particularly a resurgent housing sector — and continued stimulus measures from the U.S. Federal Reserve.
"If you’re sitting in cash or if you’ve been scared or if you have been a typical long only investor, institutional or otherwise, you probably felt you had to hold your nose and buy stocks as the market went higher," said Stephenson.
"And now I think for many people, it’s a welcome change."
Meanwhile, aluminum giant Alcoa (NYSE:AA) kicks off the first quarter earnings season after the markets close on Monday amid expectations that the recent run of soft economic data has lowered the bar for expectations.
"Analysts are starting to revise downward their forecasts numbers," said Stephenson.
"And you’re looking forward to a season coming up, the first quarter, where it looks as if it will be disappointing relative to expectations."
Alcoa is expected to produce earnings of nine cents a share, a penny less than a year ago.
The company is regarded as a proxy for the economic conditions in general as its products are used in everything from appliances to aircraft to cars.
Meanwhile, the glum economic data and a pause in the American stock rally could benefit the TSX in a couple of ways.
"You have to have something right now to interrupt this flight of quality into the U.S. market," said Pyle, adding that could be the weak jobs number.
"Or it could be initial signs out of earnings season that begins next week that are again below expectations."
And eroding positive sentiment for New York could also benefit the TSX's worst performer. The markets's global gold index has tumbled 22 per cent so far this year and led declines last week.
But bullion prices and gold stocks picked up Friday in the wake of the disappointing jobs data.
"If there is something that could upset the applecart in New York to stop this rally, it probably would vault volatility higher and that would probably cause gold to rise and ironically again, the materials sector would pick up support from that, " said Pyle.