North American markets were pummelled on Friday as the TSX entered correction territory and oil prices plunged by more than 10 per cent amid a painful selloff that continues to be spurred on by the coronavirus outbreak.
The Canadian benchmark index closed down 379 points and has shed more than 9.9 per cent in the 11 trading days since it reached a record high of 17,970 points on Feb. 20. The U.S. Dow Jones Industrial Average and S&P 500 indices fared slightly better after a late rally halved their losses. Still, they closed down 0.9 per cent and 1.7 per cent, respectively.
Sightline Wealth Management senior vice-president Paul de Sousa described the selloff as unsettling, but also one that isn’t particularly surprising.
“I think the markets were overvalued and they were almost looking for a reason to sell off,” de Sousa said. “It’s human nature to try to squeeze every drop of returns out of the fruit and I think they’ve been dealt quite a swift blow.”
The coronavirus, which has now infected more than 100,000 people and killed 3,400, continues to weigh on investors who are still unsure of how far it will spread and what the domino effect will be on businesses. Any continued downward move by the markets will depend on how many more cases are recorded and how many more countries it spreads to, de Sousa said.
K.J. Harrison Investors CEO Joel Clark is confident the markets will eventually rebound, but he is staying on the sidelines for now. Clark uses the CBOE Volatility Index, a fear gauge for the markets also known as the VIX, to guide some of his investment decisions — and it’s telling him that inaction remains the best path.
“The VIX is at 45 and any time the VIX is over 31, the market is uninvestible,” Clark said. “The only things working right now are bonds and gold. There isn’t anything in the equity market immune to the selloff.”
With turmoil in equity markets, some investors have apparently turned to debt. Yields for the five-year and 10-year Government of Canada bonds fell below one per cent this week. Despite climbing at times on Friday, those yields still ended up hovering at around 0.68 per cent and 0.73 per cent, respectively.
I’d rather own technology on a big correction than I would oil
Joel Clark, CEO, K.J. Harrison Investors
Oil prices were also bludgeoned on Friday, sinking into a deeper bear market after after Russia balked at OPEC’s proposed steep production cuts to stabilize prices hit by economic fallout from the coronavirus, and OPEC responded by removing limits on its own production.
The cut has yet to materialize, with Western Canada Select falling about 13 per cent Friday to US$27.88. Since reaching its 2020 high of US$41.35 in January, the Canadian benchmark is now down more than 30 per cent.
U.S. West Texas Intermediate crude dropped US$4.62, or 10.1 per cent, to US$41.28, its lowest close since August 2016 and the largest daily percentage loss since November 2014.
OPEC’s struggles to deal with the damage caused by the coronavirus outbreak will likely continue to squeeze energy prices. In China, the epicentre of the outbreak, OPEC has lost significant business from the world’s largest oil importer as demand for fuel has plunged by more than 20 per cent — or three million barrels per day — this year.
Under pressure, OPEC has been looking to implement an output cut of 1.5 million barrels per day until the end of 2020. That would be on top of an already enforced cut of 2.1 million barrels per day currently in force.
Analysts from TD Securities noted that the ongoing spread of the coronavirus had already “weighed heavy ” on crude oil markets.
Clark likens oil markets to a “do not fly zone.”
“I don’t see capital coming back in a big way,” he said. “I’d rather own technology on a big correction than I would certainly oil.”
Before the U.S. markets bounced in the final hour of trading to halve their losses, de Sousa said that stocks could bounce by two to three per cent in the short term before plunging an additional 10 to 15 per cent in the coming months.
Long-term-minded investors who are looking to buy into the weakness can do so, de Sousa said, but only with one-third of their intended final position at a time. That’ll grant them the possibility of averaging out to the downside if the losses continue to occur.
“I think the worst is yet to come,” he said. “To think of this as a bottom is probably wishful thinking.”