TORONTO - Investors on North American stock markets are in for further losses as a long-anticipated market correction took hold last week, sparked by a combination of slowing global growth, the end of a key stimulus measure by the U.S. Federal Reserve, a surging greenback — and just plain seasonality.
"People are now using any news at all as an excuse to go," said Colin Cieszynski, chief strategist at CMC Markets.
Losses were steep with the TSX falling 562 points or 3.8 per cent, leaving the main Toronto index down 8.6 per cent from its September high but still up 4.45 per cent year-to-date. The energy sector was a huge weight, losing more than seven per cent last week alone as oil prices hit 22-month lows around the US$86 a barrel level. A higher American currency also depressed prices since commodities are priced in U.S. dollars.
New York's Dow industrials gave back 466 points or 2.8 per cent as the blue chip index gave up the last of its gains for the year.
The view that the U.S. is the only major economy supplying appreciable lift to the rest of the world solidified last week when Germany, Europe's biggest economy, delivered disappointing data on factory orders, industrial production and exports, raising worries that the economy could slip into recession.
"We really are in a situation where everybody else is really starting to struggle here and especially the Germans — their economy just seems like the wheels are falling off," said Cieszynski.
The limits of help available from central banks are also becoming clear.
There have been increasing calls for the European Central Bank to do more to stimulate the economy, such as embarking on massive bond buying - the exercise known as quantitative easing which the U.S. Federal Reserve has used to good effect. But ECB president Mario Draghi has made it clear that governments need to do more on the fiscal side.
Also, the Fed's third and likely final dose of quantitative easing comes to a close at the end of this month, which is something that Cieszynski said worries him most, noting that U.S. markets retreated 10 per cent when the central bank ended the previous two bouts of stimulus.
"The bigger issue is that the liquidity party is ending," he said.
Analysts maintain that seasonality is also a factor as September and October are traditionally the worst trading months of the year.
"Someone commented April being the cruelest month — not on the market," said Monika Skiba, senior portfolio manager at Manulife Asset Management.
"The markets’ season is the fall."
The correction on markets isn't seen as a surprise since markets, particularly those in the U.S., have surged ever since the post-financial meltdown lows from March 2009 and there hasn't been a meaningful correction for indexes in years. Most analysts regard corrections as part of the investing landscape and welcome them as they tend to put some sort of a floor underneath stock prices.
This is also happening just when earnings reports from the third quarter are starting to flood the market. Traders expected a decent season with earnings continuing to grow, but at a slower pace. There was also uncertainty about how the higher greenback would affect overseas earnings of the big multinationals.
In any event, Cieszynski think that earnings could give individual companies a boost, but not to the overall market.
With markets awash in red ink, it's only understandable investors wonder how long this will last but Cieszynski noted that seasonality provides its own complication this year.
"At some point we will get a rally into the end of the year," he said. "My concern is, I think because the seasonal correction started late, it might drag into November, particularly with quantitative easing ending October 31, it might drag a bit into further into November than usual."