A currency trader watches monitors at a foreign exchange dealing room in Seoul, South Korea on Thursday in this file photo.Lee Jin-man/The Associated Press
U.S. and Canadian stocks on Thursday closed out their worst quarter since the onset of the COVID-19 pandemic with another session of broad losses and growing unease among investors that the bloodletting in markets won’t let up any time soon.
The world’s most closely followed benchmark stock index, the S&P 500, saw the steepest percentage decline in the first half of a year since 1970.
The Canadian stock market has fared better, but its outperformance has been eroding in recent weeks amid growing bets that a rush by central bankers to hike interest rates to combat skyrocketing inflation will push economies into recession. Such a scenario paints an unsupportive picture for the S&P/TSX Composite Index, due to its heavy weighting of economically sensitive sectors such as energy, metals and financials.
In total, more than US$13-trillion has been erased from global stocks in a year that has also seen steep losses in bond markets and a breathtaking drop in cryptocurrencies, once thought to be a compelling way to diversify away from larger asset classes.
The second half will now start with a pervasive sense of negativity.
“All year it’s been a tug-of-war between inflation and slowing growth, balancing tightening financial conditions to address inflation concerns but trying to avoid outright panic,” said Paul Kim, chief executive officer at Simplify ETFs in New York. “I think we are more than likely already in a recession and right now the only question is how harsh will the recession be?”
“I think it’s very unlikely that we’ll see a soft landing,” he added.
Data for the world’s biggest economy released Thursday did little to allay those fears. U.S. disposable income slid lower, consumer spending decelerated, inflation remained hot and jobless claims inched higher. Meanwhile, Statscan data published Thursday showed Canada’s gross domestic product fell 0.2 per cent month over month in May, surprising economists.
Reflecting concerns about the economy, bond yields slid for a third straight day, with the yield on the benchmark U.S. 10-year Treasury briefly sliding below the 3 per cent threshold for the first time since early June.
“We’ve started to see a slowdown in [U.S.] consumer spending,” Said Oliver Pursche, senior vice-president at Wealthspire Advisors, in New York. “And it seems that inflation is taking its toll on the average consumer and that translates to corporate earnings which is what ultimately drives the stock market.”
Many economists doubt global economies are already shrinking, but they are rapidly scaling back expectations for growth. The Bank of Montreal now expects global growth will fall below 3 per cent this year, down from its forecasts of 4.5 per cent six months ago.
The bank still forecasts Canada will grow 3.4 per cent, but that’s down from earlier predictions, and for next year, it expects growth of only 1.5 per cent.
“With consumer confidence falling fast, seemingly everywhere, and business sentiment now also souring, the risks to our growth call are tilted to the downside,” BMO chief economist Douglas Porter said in a research note Thursday.
The Dow Jones Industrial Average fell 253.88 points on Thursday, or 0.82 per cent, to 30,775.43. The S&P 500 declined 33.45 points, or 0.88 per cent, to 3,785.38. And the Nasdaq Composite dropped 149.16 points, or 1.33 per cent, to 11,028.74.
The Nasdaq had its largest-ever January-to-June percentage drop, while the Dow suffered its biggest first-half percentage plunge since 1962.
Technology companies, retailers and other stocks that were big winners during the pandemic have been among the biggest losers this year on Wall Street. That includes a more than 36 per cent tumble for Tesla, a 71 per cent nosedive for Netflix and a more than 50 pre cent plunge for Meta, Facebook’s parent.
Rising bond yields have made these stocks look overpriced relative to less risky corners of the market, such as utilities.
The S&P/TSX Composite on Friday fell 217.28 points, or 1.14 per cent, to 18,861.36. It declined 11 per cent in the first half of the year, compared with a 21 per cent tumble for the S&P 500.
Among the biggest decliners this year is one of the TSX’s most heavily-weighted stocks, Shopify. Once Canada’s most highly valued stock based on market capitalization, it’s down 77 per cent this year amid the downdraft in the technology sector.
The tumble in equities has severely tested the popular strategy of buying stocks on market weakness, which rewarded investors for the better part of the last decade but has floundered this year. The S&P 500 has seen three rebounds of at least 6 per cent this year that have reversed to fall below its prior low point. The latest bounce has the index up about 3 per cent since its mid-June low.
Another popular approach that has suffered is the so-called 60/40 portfolio, in which investors count on a blend of stocks and bonds to protect against market declines, with equities rising amid economic optimism and bonds strengthening during turbulent times.
That strategy has gone awry in 2022 as expectations of hawkish central banks weighed on both asset classes. The BlackRock 60/40 Target Allocation fund is down about 16 per cent since the start of the year, its worst performance since it launched in 2006.
Few analysts believe the wild swings in markets will subside until there is evidence that inflation is cooling, allowing the U.S. Federal Reserve to slow or halt its monetary policy tightening.
With files from Reuters and The Associated Press