Canada’s biggest stock exchange plunged by as much as three per cent at one point Wednesday, in a wild day of trading experts say exemplifies a new era of volatility.
The Toronto Stock Exchange closed 159 points lower Wednesday, below 12,000 for the second time this week, after dropping by as much as 450 points just after noon.
U.S. stock markets saw similarly wild swings Wednesday, with the Dow Jones Industrial Average falling by more than 500 points before cutting that loss in half to close down 249 points.
Investors from England to Japan to Brazil to Germany have also watched their stock markets fall — a drop of 20 per cent or more from recent peaks.
It has been the worst start to a year on record for global markets as pessimism takes hold, despite the absence of glaringly negative economic data.
“It’s all about psychology and the market is manic,” said James Thorne, chief capital market strategist at Caldwell Securities.
“We’re entering into a new phase where volatility is going to be a lot higher.”
The Volatility Index, an indicator of fear levels over the next 30 days, rose by 18 per cent at one point Wednesday before settling at about eight per cent higher.
That suggests the market rout is not over.
The index is hovering around 30, which is elevated, but much lower than its 2008 peak of 89.
Wednesday’s drop in the TSX continued a three-week downturn that has seen it lose 10 per cent of its value, amounting to billions of dollars.
The resource-heavy TSX is being battered by a downturn in benchmark oil prices, which closed at a nearly 13-year low of $28.35 U.S. a barrel Wednesday.
Crude prices have dropped 28 per cent this year alone as investors fear a growing global supply glut and weakened demand signals a slowdown in global growth.
The loonie closed higher against the U.S. dollar for the first time this year, at 69.01 cents U.S. It oscillated all day between gains and losses of within fractions of a cent as currency traders weighed the Bank of Canada’s decision to maintain interest rates at 0.5 per cent against another decline in oil prices, in a move to prop up the dollar.
Wednesday’s events highlighted how much Canadian economic news is increasingly overshadowed by global economic trends, said Craig Fehr, principal investment strategist at Edward Jones Investments.
“Some of it is just a pile-on effect for investors — which is, in the absence of any news to the contrary, the short-term path for the markets is lower just based on a building sense of pessimism.”
More than two-thirds of the world’s economies benefit from a decline in oil — as do Canadian consumers — which should be good news for the outlook on global consumption and trade.
“But what we’re seeing in recent weeks is there hasn’t been a lot to divert investors’ attention away from these primary risk factors of oil and China,” even though those risks have been known for at least a year, he said.
“This focus on the risk factors without any focus on good news could continue to drive volatility if not weakness in the near-term.”
As investors flee stocks for safe havens such as U.S. Treasury bonds, the U.S. dollar and gold, Craig Jerusalim, portfolio manager of Canadian equities at CIBC Asset Management, is spending some time on reassuring investment advisers.
“What you are seeing today, with the sharpness down and the rally up, are those competing forces between fear and greed,” Jerusalim said.
“If you are trying to time the markets, you are probably better off betting on red or black at the casino, because, that way, you have to be right once. If you are trying to time the market, you have to be right on both the sale and on the buy.”
Canadians didn’t see this sort of volatility from 2012 to 2014, said Barry Schwartz, chief investment officer at Baskin Wealth Management.
The Dow’s momentary drop of three per cent on Wednesday happened twice in 2015, but that was the first time it saw such a steep loss since 2011, Schwartz added.
The volatility will continue, said Colin Cieszynski, chief market strategist for CMC Markets, in part, because of uncertainty around crude oil prices, especially with sanctions lifted against Iran, a big oil producer.
“A lot of things that people had been worried about are moving from something that’s coming to something that’s going,” he said referring to data on the Chinese economy and the lifting of the sanctions imposed on Iran. “But, at this point, it’s almost taken on a life of its own.”
Ultimately, until “the floor on oil prices is known, we could see a lot of volatility in markets,” he said.
Volatility is returning to the market after a few years of extended gains, and the losses now are simply a reminder of what a normal market pullback feels like, Fehr said.
Such volatility was the norm prior to 2008, when the VIX or “fear index” reached a peak.
The losses are unlikely to persist in the long term as sellers run out of stocks to unload and investors turn back to look at the information that really matters, such as the next jobs report from the U.S., expected in early February, Fehr said.
“If it’s strong, that’s going to be the octane the market would need to bottom out a little bit and turn around and start to move higher.”
— with files from Vanessa Lu