Traders work on the floor of the New York Stock Exchange, Aug. 6.Richard Drew/The Associated Press
The volatility that has rocked global stock markets this week may be offering a pleasant takeaway for rattled investors: Canada looks like an attractive market for anyone in need of shelter from the turbulence.
Tuesday’s market action underscored the point.
The S&P/TSX Composite Index fell just 1.1 per cent. That’s on a day that began with some trepidation over how widely the global sell-off would spread, after Monday’s alarming equity market downturns in Japan and the United States arrived with new fears of a global economic downturn.
More remarkably, some key Canadian stocks from several different sectors actually performed reasonably well on Tuesday. Telecom giant BCE Inc. BCE-T and oil producer Suncor Energy Inc. SU-T ended the day slightly higher, while Constellation Software Inc. CSU-T and Hydro One Ltd. H-T dipped only slightly, alleviating fears of an equity market bloodbath.
This might be an early indication that the Canadian stock market is well positioned to benefit as investors recoil from overhyped U.S. technology plays and seek stocks with reasonable valuations closer to home.
In particular, some observers expect that the market can gain traction as interest spreads beyond the Magnificent Seven U.S. stocks, which have gone gangbusters for well over a year as optimism about the potential for artificial intelligence gained momentum.
“That doesn’t mean that tech stocks aren’t going to go up. It just means that I think you’re going to garner more equity performance from other areas,” Brian Belski, chief investment strategist at BMO Capital Markets, said in an interview.
He believes that Canadian stocks stand to outperform, after trailing U.S. stocks by a wide margin.
The Bank of Canada’s recent interest-rate cuts should help the Big Six banks, which have been underperforming the S&P/TSX Composite Index this year amid concerns about credit health. And, Mr. Belski added, energy stocks stand to gain ground as fears of a global recession recede.
“Canada is ripe to rebound because of global misconceptions” about the economy, he said.
The Canada-as-haven trade was not a popular call in the first half of the year. By mid-July, the S&P 500 was up 18.8 per cent in 2024 after setting a series of record highs, or more than nine percentage points ahead of the S&P/TSX Composite Index.
But the lead has since narrowed to six percentage points. And this week’s market turbulence offers further reason to expect that the home team may be able to mount a longer-term comeback, as hot markets turn cold.
When Canadian markets were closed on Monday for a holiday, Japan’s Nikkei 225 ISHNF skidded 12.4 per cent, marking its biggest drop since 1987. The S&P 500 fell 3 per cent, for its worst one-day decline since September, 2022.
Big technology stocks, such as Nvidia Corp., NVDA-Q a popular play on artificial intelligence and a key member of the Magnificent Seven, suffered some of the most severe declines as investors ditched winners and sought cover in safer trades, including government bonds.
“While the Magnificent Seven will continue to generate strong earnings, it does appear as if growth is slowing. In fact, based on estimates, the growth rate for the Magnificent Seven will not be much different from the rest of the market in 2023,” Ian de Verteuil, an analyst at CIBC Capital Markets, said in a note.
“As we head to a U.S. election which looks increasingly like a ‘split decision,’ we believe the market will again favour less expensive stocks, rather than higher priced entities,” he added.
Granted, this week’s bout of volatility could blow over.
On Tuesday, the Nikkei 225 rebounded 10 per cent, clawing back most of its previous day’s losses. Nvidia gained 3.3 per cent and Meta Platforms Inc., another member of the Magnificent Seven, gained 3.9 per cent, suggesting that investors remained focused on large tech plays, especially when they can be bought on dips.
Other activity also pointed to returning calm. The CBOE Volatility Index, a popular gauge of investor anxiety, subsided to about 34 on Tuesday. It spiked above 65 early Monday, reaching its highest level since the onset of the COVID-19 pandemic and lockdowns that roiled the economy.
Savita Subramanian, equity strategist at Bank of America, said in a note that market corrections of at least 10 per cent, from peak to trough, occur about once a year on average – meaning this one was “due.”
Still, the return of volatility has reminded investors that stocks can have bad days, and winners can become dangerously overextended when too many investors chase the same names. The solution, at least for Canadian investors, may be remarkably easy.