After Dow and markets fall sharply, analysts say there’s a lesson for investors: ‘Volatility is back’
North American markets fell sharply Wednesday, with the Dow Jones Industrial Average losing more than 800 points and the TSX shedding 336 as rising U.S. Treasury yields and increasing tension between the U.S. and China gave investors pause.
“Volatility is back,” RBC Global Asset Management chief economist Eric Lascelles said in response to the market turmoil. “It’s been a very smooth ride and we’re back to some bumpiness and that doesn’t surprise me given where we are in the cycle and given some of the political uncertainty.”
Lascelles said the markets are being weighed down by a variety of factors, chief among them rising U.S. Treasury yields.
In two weeks, 10-year yields for U.S. government bonds have risen significantly to a seven-year high of 3.22 per cent, according to Lascelles. When this kind of move occurs, there’s a “swirl and churn” in the market, Lascelles said.
“A higher yield is more attractive and so suddenly people are less inclined to buy stocks,” he said, adding that higher interest rates would also decrease demand for equities because of higher borrowing costs. “The bond market is now starting to attract extra investing money that was previously housed elsewhere.”
In Canada, bond yields have also similarly risen as the five-year government of Canada bond surged to 2.417 per cent from 1.7 per cent in October 2017.
The U.S.-China trade war also continues to play a role in causing risk aversion in the market, Lascelles said. In the latest jab at China, U.S. Secretary of the Treasury Steve Mnuchin warned the country Wednesday against weakening its currency, the renminbi. The U.S. has already imposed tariffs on US$267 billion worth of Chinese imports and U.S. President Donald Trump has threatened that more tariffs are on the way.
In the face of a barrage of threats from Trump, the Shanghai Stock Exchange 50 index has fallen more than four per cent in a little over a week.
Largely due to uncertainty over the trade war, the International Monetary Fund released a report on Tuesday downgrading its outlook for global growth for 2018 to 3.7 per cent from 3.9 per cent.
The prospect of slower growth and other factors such as Hurricane Michael hitting Florida and an increase in oil prices may also be combining to spook investors.
“There is undeniably a psychological element to how stock markets work and sometimes they beat up on themselves,” he said. “This is one of those days.”
Despite the volatility and a muted response to the recent USMCA trade deal, Bank of Canada senior economist Krishen Rangasamy said the fundamentals for Canadian investors remain sound and that they should remain patient.
“There’s no reason to be negative about Canada,” Rangasamy said.
Rangasamy said a strong outlook for oil prices and the expected fiscal stimulus that will come as a result of pre-election spending in 2019 both bode well for markets here.
Overall the Dow fell 3.15 per cent Wednesday to close at 25,598.74. The TSX closed down 2.12 per cent at 15,517.40.