Falling oil prices are adding to the downdraft in stocks, as the decline in Canadian and U.S. markets gained speed Tuesday.
U.S. stocks slumped back into negative territory for 2018 and Canadian stocks were hit again by tumbling oil prices, as investors weigh further evidence that global economic activity is slowing.
The Standard and Poor’s 500, which declined 1.8 per cent, is now down 10 per cent since hitting its high point in September, while Canada’s S&P/TSX Composite Index closed at its lowest level in two years, weighed down by Tuesday’s 6.6-per-cent decline in crude oil.
West Texas Intermediate oil, a U.S. benchmark for crude, fell to US$53.43 a barrel, touching its lowest level in a year.
Oil’s downward slide, part of a 30-per-cent retreat since early October, comes as observers watch for slowing demand for energy amid signs of a cooling global economy. But Tuesday’s drop may have also had to do with geopolitics: the decline accelerated after U.S. President Donald Trump said he stood by Saudi Arabia, despite reports that the Central Intelligence Agency has concluded that Saudi Crown Prince Mohammed bin Salman likely ordered the killing of journalist Jamal Khashoggi last month.
Mr. Trump’s comments were seen as supportive of weak oil prices, given that Saudi Arabia meets with the Organization of Petroleum Exporting Countries next month to discuss potential production cuts – an action Mr. Trump does not favour.
Canada’s energy-heavy S&P/TSX composite fell 194.01 points, or 1.3 per cent, closing at 14,877.00.
The S&P 500′s decline to 2,641.89 means the index is now down 1.2 per cent for the year. The 30-member Dow Jones Industrial Average fell 551.80 points on Tuesday, or 2.2 per cent, closing at 24,465.64.
Some observers believe the market volatility reflects concerns that the economic expansion is now sputtering amid rising interest rates, weak oil prices and discouraging progress over trade tariffs and Brexit.
Tuesday’s disappointing October reading for U.S. single-family housing starts, an important economic indicator, added to the gloom. The number of homes in the initial stages of construction fell by 1.8 per cent from September and are down 8.8 per cent from a recent peak in November, 2017.
“Residential construction surely seems to be in the midst of an extended slowdown. We suspect affordability problems might be biting at this juncture, with mortgage rates on the rise and home prices advancing at a faster pace than wages,” Jocelyn Paquet, an economist at National Bank Financial, said in a note.
David Taylor, president and chief investment officer at Taylor Asset Management, said that market turbulence also follows concerns that companies are struggling to hold onto their profit margins as inflationary pressures build.
“I listen to a lot of conference calls and we hear a lot about cost pressures, whether it’s labour pressures or transportation costs. A lot of companies are meeting their sales numbers but their struggling with margins," Mr. Taylor said.
But the downturn is also rooted in concerns about specific companies. Among them, investors are growing concerned that consumer appetite for Apple Inc.’s latest iPhones is slowing as chip-makers, screen manufacturers and software companies lower their forecasts for smartphone demand. Apple shares fell 4.8 per cent, and are now down nearly 24 per cent since September.
The dramatic reversal illustrates how once high-flying technology stocks are struggling nine years into an economic expansion. Indeed, the so-called FAANG stocks – Facebook Inc., Amazon.com Inc., Apple, Netflix Inc. and Alphabet Inc.’s Google – have lost about US$1-trillion in combined value, based on declines from their respective 52-week highs, according to CNBC.
Canadian energy stocks, already hit hard from especially weak prices for Canadian heavy crude, fell further into a deep sell-off. The iShares S&P/TSX Capped Energy Index ETF, an exchange-traded fund that tracks the Canadian energy sector, fell 2.9 per cent, hitting its lowest point since February, 2016.
Strategists who are rolling out their forecasts for 2019 expect that broader market turbulence will continue. Many of the strategists’ predictions are being influenced by conditions they’re seeing as 2018 ticks down, including a focus on declining global economic activity and the rising risks of an outright recession in the United States.
“Cash will represent a competitive asset class to stocks for the first time in many years,” David Kostin, chief U.S. equity strategist at Goldman Sachs, said in his 2019 outlook, released this week.
Mr. Kostin thinks there’s a 50-per-cent chance the S&P 500 returns just 5 per cent next year as corporate profit growth slows to 6 per cent, and just 4 per cent in 2020.
That would mark a substantial cooling from the tax-cut-driven growth investors have witnessed in the third quarter. According to I/B/E/S data from Refinitiv, companies in the S&P 500 are on track to report profit growth of 28.2 per cent in the third quarter, marking the strongest growth since the fourth quarter of 2010.
David Berman