"The main purpost of the stock market is to make fools of as many men as possible - Bernard Baruch, American financier and presidential adviser.
In a paragraph of prophetic clarity, political analyst Charlie Cook wrote in the Atlantic magazine last week that stock and bond markets have been remarkably patient during the debt-ceiling debate in the U.S. Congress, but might reach the end of their patience any day. Even a modest deal on deficit reduction and short-term increase in the debt ceiling, he said, might not bring enough confidence to the markets.
Their patience ended Thursday. A broad sell-off engulfed global markets, erasing all the gains of 2011 to date, and dragged the three major U.S. indexes, the Standard & Poor 500, the Nasdaq and the Dow Jones Industrial Average, into official correction territory - defined as a 10-per-cent drop from recent highs. In Canada, the slump has been even steeper as the resource-heavy S&P/TSX composite index lost more than three per cent in Thursday's session and more than 12 per cent since this year's peak. The Dow fell by 512 points, its biggest drop since Oct. 22, 2008. Many currencies retreated as well, as traders fled the U.S. dollar for the relative safety of the Swiss franc and Japanese yen and safe-haven bonds. The Canadian dollar also lost ground as oil prices weakened.
The fear Thursday was palpable - and measurable. The VIX, the Chicago Board Options Exchange volatility index often called the fear index, surged by 35 per cent to 31.5 - levels 30 and above are deemed to be elevated. It last reached this mark in March when the Japanese tsunami and nuclear catastrophe dominated the headlines.
If we buy into the notion that stock markets reflect perceptions of economic conditions, then Thursday's rout may be explained by concerns over economic prospects. Forecasts of U.S. growth of gross domestic products of around 2.6 per cent at the start of the year have been slashed by Bank of America Merrill Lynch, among others, to 1.7 per cent. Share prices are driven by corporate earnings and, while earnings on average have been healthy so far this year, the consensus is that they will not be sustainable with economic growth below two per cent.
Economic data continue to be disappointing. Analysts expect the U.S. payroll report due to be released this morning will show little change in the 9.2-per-cent unemployment rate. The July Institute for Supply Management index for manufacturing indicated stagnation rather than expansion, and household spending dipped in June for the first time in two years - bad news for an economy 70-percent dependent on consumer spending. The weakness of the U.S. economy has increased the odds that Washington will provide another round of stimulus, dubbed QE3.
The economic picture is just as gloomy in Europe, where the European Central Bank announced Thursday that it would provide loans to banks to improve liquidity. It has shelved plans to raise interest rates to curb inflation as debtfinancing costs are soaring, with yields on 10-year government bonds above six per cent. Ireland, Greece and Portugal already depend on emergency loans from the European Union and International Money Fund; Italy and Spain, the third-and fourth-biggest economies in the eurozone respectively, could soon follow.
Commodities were particularly hard hit by the sharp downturn, putting many British Columbia-based companies under pressure. Teck Corp., Goldcorp, Eldorado Gold, Northgate Minerals, Methanex, Quadra FNX Mining, West Fraser Timber, Ivanhoe Mines, Finning and Ritchie Bros. all took a stock market drubbing.
With Europe seemingly unable to solve its debt crisis and the U.S. equally unable to kick-start its economy, negative sentiment is unlikely to dissipate anytime soon. However, there will always be buyers for stocks at the right price. As Warren Buffett famously advised: "Be fearful when others are greedy and greedy when others are fearful."
In a paragraph of prophetic clarity, political analyst Charlie Cook wrote in the Atlantic magazine last week that stock and bond markets have been remarkably patient during the debt-ceiling debate in the U.S. Congress, but might reach the end of their patience any day. Even a modest deal on deficit reduction and short-term increase in the debt ceiling, he said, might not bring enough confidence to the markets.
Their patience ended Thursday. A broad sell-off engulfed global markets, erasing all the gains of 2011 to date, and dragged the three major U.S. indexes, the Standard & Poor 500, the Nasdaq and the Dow Jones Industrial Average, into official correction territory - defined as a 10-per-cent drop from recent highs. In Canada, the slump has been even steeper as the resource-heavy S&P/TSX composite index lost more than three per cent in Thursday's session and more than 12 per cent since this year's peak. The Dow fell by 512 points, its biggest drop since Oct. 22, 2008. Many currencies retreated as well, as traders fled the U.S. dollar for the relative safety of the Swiss franc and Japanese yen and safe-haven bonds. The Canadian dollar also lost ground as oil prices weakened.
If we buy into the notion that stock markets reflect perceptions of economic conditions, then Thursday's rout may be explained by concerns over economic prospects. Forecasts of U.S. growth of gross domestic products of around 2.6 per cent at the start of the year have been slashed by Bank of America Merrill Lynch, among others, to 1.7 per cent. Share prices are driven by corporate earnings and, while earnings on average have been healthy so far this year, the consensus is that they will not be sustainable with economic growth below two per cent.
Economic data continue to be disappointing. Analysts expect the U.S. payroll report due to be released this morning will show little change in the 9.2-per-cent unemployment rate. The July Institute for Supply Management index for manufacturing indicated stagnation rather than expansion, and household spending dipped in June for the first time in two years - bad news for an economy 70-percent dependent on consumer spending. The weakness of the U.S. economy has increased the odds that Washington will provide another round of stimulus, dubbed QE3.
The economic picture is just as gloomy in Europe, where the European Central Bank announced Thursday that it would provide loans to banks to improve liquidity. It has shelved plans to raise interest rates to curb inflation as debtfinancing costs are soaring, with yields on 10-year government bonds above six per cent. Ireland, Greece and Portugal already depend on emergency loans from the European Union and International Money Fund; Italy and Spain, the third-and fourth-biggest economies in the eurozone respectively, could soon follow.
Commodities were particularly hard hit by the sharp downturn, putting many British Columbia-based companies under pressure. Teck Corp., Goldcorp, Eldorado Gold, Northgate Minerals, Methanex, Quadra FNX Mining, West Fraser Timber, Ivanhoe Mines, Finning and Ritchie Bros. all took a stock market drubbing.
With Europe seemingly unable to solve its debt crisis and the U.S. equally unable to kick-start its economy, negative sentiment is unlikely to dissipate anytime soon. However, there will always be buyers for stocks at the right price. As Warren Buffett famously advised: "Be fearful when others are greedy and greedy when others are fearful."
