Global stocks fell sharply on Friday, sending the Dow Jones Industrial Average to a new low for the year as economic developments raised fresh concerns of a deteriorating global economy that may be teetering on the edge of recession.
The S&P/TSX Composite Index fell nearly 2.8 per cent, to 18,480.98, its worst performance in more than three months. The Canadian benchmark is now just 152 points above its 2022 low close in mid-July.
The broader S&P 500 index fell 1.7 per cent, to 3,693.23, putting it within 26 points of its recent low in mid-June. The Dow ended the day down 1.6 per cent.
The declines followed the release of business surveys from France, Germany and Britain, which showed that manufacturing activity contracted sharply in all three countries in September, as Europe confronts soaring energy prices and geopolitical instability from the war in Ukraine.
The latest gloomy snapshot arrives at a time when central banks are trying to halt soaring inflation with aggressive interest rate hikes, despite the economic cost.
This week, the U.S. Federal Reserve raised its interest rate by three-quarters of a percentage point, to a range of 3 per cent to 3.25 per cent, and suggested that additional rate hikes will push the key rate well above 4 per cent by next year.
“In a 4 per cent policy world, we had a baseline forecast reflecting economic stagnation for the next two years,” Beata Caranci, chief economist at Toronto-Dominion Bank, said in a note on Friday.
“A policy rate that moves into even more restrictive territory would tip the scales deeper into formal recession dynamics,” Ms. Caranci said.
Stocks fell in Europe and Asia as well, reflecting the global nature of the sell-off.
The price of crude oil fell more than 5 per cent, dipping below the US$80-a-barrel threshold to its lowest level since January and pulling down the S&P/TSX Energy sector 7.8 per cent.
An attempt on Friday by the British government under Liz Truss, the new Prime Minister, to support economic growth appeared to trigger further disorder in financial markets.
The government’s sweeping tax cuts in its mini-budget pushed up British borrowing costs dramatically as bond yields soared and sent the pound tumbling more than 3 per cent to a new 37-year low against the U.S. dollar.
“This huge fiscal event is a radical economic gamble; a ‘Go big or go home’ gamble that will put U.K. debt on an unstable footing,” said Bethany Payne, global bond portfolio manager at Janus Henderson Investors, according to Reuters.
Outside of Britain, government bond yields also climbed to fresh multiyear highs as financial markets adjust to central bank monetary policies that have driven down prices of fixed income investments (bond prices and yields move in opposite directions).
The yield on the 10-year U.S. Treasury bond briefly rose to 3.8 per cent on Friday, marking a new high for the year, before retreating back below 3.7 per cent later in the day.
Rising market volatility, which has defined much of 2022 and sapped a summer stock market rally, is now weighing heavily on investor sentiment.
The latest sentiment survey from the American Association of Individual Investors, for the week ended Sept. 21, showed that 60.9 per cent of respondents felt bearish about the stock market over the next six months.
That was the survey’s most dour reading since 2009 during the financial crisis.
Retail spending also appears to be taking a hit. Canadian retail sales in July fell 2.5 per cent, according to a report released on Friday.
The decline was significantly greater than the 2 per cent drop that economists had been expecting. Though falling gasoline prices explained a big part of the decline, sales fell in nine of 11 categories, suggesting a broader downturn amid rising borrowing costs.
Bank of Montreal said that the risks of a North America recession over the next year have risen above 50 per cent, as the cumulative impact of the Fed’s aggressive rate hikes weigh on U.S. economic activity.
BMO also downgraded its outlook for the Canadian economy. It now forecasts zero per cent economic growth next year, down from its previous estimate of 1-per-cent growth, based on gross domestic product contracting in the first two quarters of 2023.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.