Screens above trading posts on the floor of the New York Stock Exchange show only the NYSE logo after an outside provider technical glitch, Thursday, Aug. 27, 2015.Richard Drew/The Associated Press
Exhausted from a wild ride that saw stock prices whipsaw over the course of a week, equity markets took a bit of a breather Friday as investors calmed down, or headed for the cottage.
The Dow Jones industrial average was off 12 points, the S&P 500 was up a single point and the S&P/TSX composite index rose 98. After a week of mostly massive movements up or down each day, it was positively benign. More remarkably, markets are not far off where they were 10 days ago, before the latest gyrations began.
Still, the week's volatility was dramatic. U.S. markets had their worst day in four years on Monday, then their biggest two-day rise since the 2008-09 financial crisis on Wednesday and Thursday.
Oil, too, went on a roller coaster ride, plunging to close to $38 (U.S.) on Monday before making a dramatic rebound later in the week. On Thursday and Friday, the price jumped a total of 17 per cent to close out above $45.
Even in China, where the worries originated, markets solidified late in the week. Chinese stocks rose Thursday and again by more than 4 per cent Friday, after the announcement that local government pension funds will invest heavily in stocks and other assets. Earlier in the week, the Chinese central bank cut interest rates and loosened bank lending.
Bank of Montreal senior economist Robert Kavcic said he thinks the initial stock plunge happened because markets were just waiting for a reason to drop. "Stocks have just gone so long without a correction, especially in the U.S.," he said.
It has been two or three years since there was a 10-per-cent pullback, he noted, and the Chinese market upheaval "was an excuse for investors to take some profits and try to get valuations back down a little bit."
Ironically, U.S. economic data have been "nothing short of solid the last week or two," he said, with GDP numbers Thursday showing a 3.7-per-cent annual growth rate in the second quarter. Consumer spending numbers released Friday were also strong.
"There is nothing to suggest our outlook for the U.S. economy would change, and for the equity market that is probably the most important thing at the end of the day," Mr. Kavcic said.
In Canada, where commodities are key, it is no surprise that worries over Chinese growth also put stock markets in a fright, he said, even though more than 75 per cent of our exports go the United States, bank earnings were very strong, and "the housing market is still rock solid in Toronto and Vancouver."
This coming week, June gross domestic product numbers will show whether the Canadian economy has shrunk for the second quarter in a row.
Is the worst over? Mr. Kavcic noted that past corrections have usually lasted for a couple of months, and North American markets could see volatility for some time yet. Often, markets recover later in the fall and around the end of the year, although there is no guarantee that that pattern will repeat itself.
Millan Mulraine, deputy head of U.S. research and strategy at TD Securities in New York, said that while the stock plunge proved to be temporary, it sent signals that the market is very worried about China and global growth more generally.
The fact that markets didn't initially respond to stimulus measures from the Chinese central bank shows that "there is a perception that there are more profound issues in China than previously thought," Mr. Mulraine said. From now on, markets "will look nervously at every economic report out of China, and the moment you get a report that surprises to the downside, you are going to see the market move."
That market tone will also be a factor in whether the U.S. Federal Reserve Board decides to raise interest rates later this year, Mr. Mulraine said. "The issue for the Fed is not what the economy has done or is doing, but what it will do. On that front, there is sufficient uncertainty for them to be cautious."
Indeed, the Fed appears to be vacillating on an interest rate hike. New York Fed chairman William Dudley said on Wednesday that the case for a rise in September now appears less compelling. And on Friday, Fed vice-chairman Stanley Fischer said in an interview with CNBC that impressive growth in the United States was pushing the Fed toward raising rates, but it could hesitate if volatility persists. The decision has not been made yet, he added, and in any event an initial interest rate move will be very "slight."
The volatility in the markets reflects the short-term focus of many investors, said Murray Leith, direct of investment research at Odlum Brown Ltd. in Vancouver. "The average holding period of a stock is a fraction of where it was decades ago."
On days when stocks plunge, the market is behaving as if the world economy is going to go into recession, he said, yet it is more likely that low oil prices and low interest rates will prompt global growth, even if it is sluggish.
And when the U.S. Fed raises rates, Mr. Leith said, it will be just "a tiny bit off bottom."
Individuals should try to focus on medium and long-term trends, Mr. Leith said, rather than trying to anticipate short-term market movements. The global economy is moving forward gradually, and investors should look at profitable businesses with strong cash flow. "If you don't panic at times like this, you do well."