Canadian stocks were down as much as 3.9 per cent during the trading session but closed with a loss of 1.3 per cent after an afternoon rally.Mark Blinch/Reuters
The equity slump intensified on Wednesday in a wild day of trading that saw global stock prices fall into a bear market before a late-day burst of buying interest emerged in North America.
Energy stocks again took the brunt of the losses early in the day as the collapse of the oil market deepened, with the February contract of West Texas Intermediate hitting a new 13-year low of $26.19 (U.S.) in morning trading. Losses in the MSCI All Country World Index surpassed the 20-per-cent threshold from recent highs typically used to signify bear markets, before stocks rebounded.
Canadian stocks were down as much as 3.9 per cent during the trading session but closed with a loss of 1.3 per cent after the afternoon rally mitigated much of the morning's steep downside. U.S. indexes closed with losses of between 1.1 per cent and 1.5 per cent.
"There is a dramatic amount of pessimism," said Dennis Mitchell, a senior portfolio manager at Sprott Asset Management. "The number of sellers is just greater and they are less price-sensitive than they might otherwise be."
Investors sought refuge in the safety of government debt, pushing U.S. government 10-year bond yields to an intraday low of 1.94 per cent. The spread between 10-year and two-year debt shrank to its narrowest level since 2008. A flattening yield curve is seen by many as a sign of pessimism regarding economic strength.
In keeping with the year's dominant pattern, the North American equity sell-off was preceded by risk aversion in Asian and European markets. More than $15-trillion has been erased from global equity value so far this year, according to Bloomberg.
But there is very little in the way of definitive economic strains that might be powerful enough to kill a bull market. "Fundamentals aren't shifting nearly as dramatically as stocks are sliding," J.P. Morgan said in a note on Wednesday.
China's GDP growth last year was the slowest in 25 years, but at 6.9 per cent it still represents considerable economic expansion and suggests nothing more than a "mild slowdown," former International Monetary Fund chief economist Olivier Blanchard wrote in a blog post for the Peterson Institute for International Economics this week.
There was legitimate fodder for energy bears this week after the International Energy Agency warned that the oil market "could drown in oversupply." But cheap oil is traditionally good for energy importers, consumers and energy-consuming companies, and should not cause all-consuming stock weakness, Mr. Blanchard said.
He blamed "herding" for this year's selling pressure on stocks. "If other investors sell, it must be because they know something you do not know. Thus, you should sell, and you do, and so down go stock prices," he said.
The average stock in the S&P 500 is already in a bear market, having declined by an average of 25 per cent from its 52-week high, according to FactSet. This week, equity strategists at both Morgan Stanley and Merrill Lynch said at current valuations, the market is pricing in about a 50-per-cent chance of a U.S. recession. That's far higher than consensus.
"While credit spreads have widened, oil prices have collapsed, and profit forecasts are being adjusted downward, the majority of economic indicators point to continued economic expansion," Jonathan Golub, chief U.S. market strategist at RBC Dominion Securities, said in a note.
And in the absence of a recession, bear markets are rare, he said.
Some commentary has even begun to consider whether this bout of volatility could be the start of a replay of the 2008-09 crash, which still looms large in the minds of many investors.
"It is actually far more challenging to find comparisons than differences" between then and now, Tobias Levkovich, Citigroup Inc.'s chief U.S. equity strategist, countered in a recent note. He cites current loan availability, bond yields, home prices, consumer debt levels and employment as far stronger today.
"While sentiment is poor both qualitatively and quantitatively, we must push back against the notion that the backdrop for investors is similar to the situation seen eight years ago," Mr. Levkovich said.
Sprott's Mr. Mitchell said he's taking advantage of falling equity prices by adding to existing positions. "Long-term returns are getting better and better by the day," he said. "Investors need to keep that in mind."