The S&P/TSX composite index fell 74.82 points to close at 14,469.00, with the energy sector down almost 3 per cent.
After a volatile month in which indexes headed downward, there was a surge in stock prices last week that pushed up the TSX by 2.25 per cent.
But on Monday Goldman Sachs predicted oil could go as low as $70 a barrel by 2015, because of the big supply of U.S. shale oil now coming onto the market. The U.S. brokerage also predicts lower demand for crude oil.
Goldman Sachs’ view is far from universally held. Russ Koesterich, chief investment strategist, BlackRock, one of the U.S. largest institutional investors says he believes demand for oil will continue strong from emerging economies.
“I think levels we’re seeing right now in mid-80s are closer to the bottom of the range,” he said in an interview with CBC’s The Exchange with Amanda Lang.
“I’m more comfortable that oil could move a bit higher in coming months.”
But traders were bracing for the impact of the Goldman prediction on markets.
"The cuts are fairly material so when you have a dealer with that kind of clout come out, and with those type of changes, then it's bound to have some type of impact on the markets and obviously we're seeing that . . . ," said Gareth Watson, Richardson GMP vice-president, investment management and research.
Oil itself dipped as low as $79.44 US a barrel Monday morning, but recovered to close at $81 in trading in New York on that prediction.
The Canadian dollar edged lower to 88.94 cents US.
The Dow Jones industrial average was up 12.53 points to 16,817.94, the S&P 500 dropped 2.95 points to 1,961.63 and the Nasdaq was up 2.21 points to 4,485.93.
The nervousness on markets is set to continue all week, as the Fed prepares to end its quantitative easing program.
The U.S. central bank has announced it will end its program of buying U.S. Treasury bonds, which it ramped up during the financial crisis to encourage easier credit, at the end of the month.
Markets have been nervous because it is believed that the Fed’s low-interest rate, easy credit policy has helped encourage this year’s stock market rally.
On Wednesday, the Fed will make its next announcement on interest rates and provide some clarity on the end of quantitative easing.
Get used to the volatility
On Thursday there will be new data on how the U.S. economy performed in the third quarter. Indicators have been mixed, especially on retail buying and factory orders, so traders will be watching whether the U.S. is on track for three per cent GDP growth this year.
Koesterich said investors should get used to the kind of volatility seen in the last few weeks.
“The somewhat scary reality is that the more recent past is more indicative of normal. Equity market volatility in the high teens, which is what we’ve seen the last month or so, that’s the historical norm,” he said.
The last few years have been marked by very quiet markets, he said, but with bonds giving paltry returns and equities still showing potential to grow, it’s the only game in town.
"Over the long term, I do think that equities are better positioned that bonds, equities have produced better inflation-adjusted returns over the long term, and the price of that is withstanding the volatility."