The bear market is back: TSX swoon tops 20%

Last updated Tuesday, Oct. 04, 2011 7:26AM EDT
By: David Parkinson
It’s the sixth time in less than a month that Canada’s benchmark has suffered a 200-point-plus daily decline. The hectic descent has sliced 12 percent off the value of Canada’s benchmark index since the start of September and that’s just the latest step in a deep downward trend that dates back to early April. On Monday, the total slide since the springtime peak reached 21.2 percent, surpassing the 20-per-cent milestone that traditionally defines a bear market.

Despite Canada’s reputation as a rare bastion of stability in a world of troubles, the Toronto exchange’s heavy exposure to the global economic cycle has rapidly made it one of the world’s have-not stock markets.

 “It has nothing to do with Canada,” said Neil Matheson, senior vice-president of investment strategy at Standard Life Investments in Montreal. “The reaction is more about what’s happened to the outlook for global growth.”

“The issue is not so much the domestic economies in North America, but where our markets are exposed to vulnerabilities elsewhere in the world,” said Myles Zyblock, chief equity strategist at RBC Dominion Securities Inc.

The Canadian stock market depends heavily on commodities, which have gone into full retreat, driven by mounting evidence of a global economic slump, which many fear could be deepened by Europe’s debt problems. Almost half of the S&P/TSX composite is made up of energy and materials stocks, and those sectors have been among the biggest losers as investors lower their expectations for global demand for resources.
Exacerbating the downturn hasbeen a general cashing-out of commodities by hedge funds and other speculative investors. Remembering the lessons of 2008, many of these investors have reduced their risk exposure and raised cash.

John Kurgan, senior market strategist at commodities dealer MF Global Canada, said the TSX’s slide is inextricably linked to oil. “Crude oil really peaked in April, and that’s when we saw the peaks in the TSX,” he said.
After reaching nearly $114 (U.S.) a barrel in New York in April, oil closed Monday at $76.46, a drop of 3.5 per cent on the day and 33 per cent from its peak.

Adding insult to injury, the price of gold –normally a haven in times of financial instability – lost its footing in recent weeks, as it started to look too expensive for increasingly jittery investors. With gold stocks representing roughly 15 per cent of the S&P/TSX composite index, the precious metal’s crumbling support has weighed heavily on the Canadian market.

The slide in oil and other key commodity prices has spurred investors to abandon the Canadian dollar, sending it to a 13-month low against its U.S. counterpart. The falling loonie is yet another knock against Canadian stocks, as foreign investors stand to take home less money when the currency loses value.

“The currency also has a massive correlation with [the price of] oil,” Mr. Matheson said. “I think [the dollar’s decline] reflects all the money that’s leaving.”

The recent slump in all these assets share a common thread: The risk flight among the world’s investors that has been triggered by the deepening worries about Greece’s debt crisis, and its threat to the stability of global financial markets. The fears have sent investors scurrying for the safety of their old stand-by – the U.S. dollar and U.S.-denominated bonds – at the expense of everything else, market strategists said.

“It was not so much a flight to quality as a flight to something very liquid, where at least you know you could get your money back,” Mr. Kurgan said.

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