Dow Jones loses 600 points as concern over rate hikes sets in
The TSX and Dow Jones were sharply lower on Wednesday as fears of higher interest rates to come took the wind out of the sails that have powered stock market returns for years.
The Toronto Stock Exchange was off by 250 points or more than 1.5 per cent at one point, the fourth day in a row that the benchmark Canadian stock index was lower.
Every subsector on the TSX was lower, from the banks, to energy, to health care names, retailers and other consumer staples.
Oil prices were lower, with the U.S. benchmark West Texas Intermediate losing almost $2 to trade at just over $73 US a barrel. Canadian crude oil, known as Western Canada Select, is even cheaper, at barely over $26 US a barrel. That puts the gap between the two oil prices at its highest level on record, which is weighing heavily on shares of Canadian oil companies.
"There's just no demand for this heavier Canadian crude, and you can't get it to refineries" says John Zechner, chairman of Toronto-based money manager J. Zechner Associates.
In the U.S. the losses were even steeper, but the laggard there wasn't oil but technology. The so-called FAANG stocks — high flying technology names such as Facebook, Amazon, Apple, Netflix and Google — had been responsible for much of the gains seen on U.S. stock markets this year. But they, too, seem to be flying into turbulence.
The Dow Jones Industrial Average was off by more than 600 points or more than two per cent late in the trading day. The broader S&P 500 was also down, for the fifth day in a row, while the technology-focused Nasdaq was off by more than three per cent.
Fear over higher rates is being best expressed in the bond market where prices have slid lower for weeks. Central banks in the U.S. and Canada are expected to raise interest rates several times in the next year, which makes current bonds less attractive than future ones, which will come with higher yields. It's also bad news for stocks as that means it will get more expensive to borrow money to invest.
"Investors missing this rate move is tantamount to letting yourself get run over by a glacier," said Mike Terwilliger, portfolio manager of Resource Liquid Alternatives for the Resource Credit Income Fund in New York.
Zechner says after booming for so long, stock markets tend not to rise forever and markets historically correct before the broader economy does.
"Rising interest rates in the U.S. ... are suddenly becoming much more of a concern and people are paying attention," he said.
He notes that while the U.S. stock market has managed to post gains virtually uninterrupted, that's not the case in most other parts of the world, so that trend may be finally catching up in North America.
"We're seeing cracks in the armour [and] to me it's not why that happened," he said.
"It's why hasn't it happened sooner than this."