The dramatic stock market losses in recent days were unexpected, but one Canadian portfolio manager says investors should refrain from interpreting them as a sign that the North American economy is tipping into recession.
“I wouldn’t overreact to this,” said Craig Basinger, chief market strategist at Purpose Investments, in an interview Tuesday.
While Canada’s main stock index sank in late-morning trading Tuesday, U.S. stock markets had already started to regain some of the ground lost in a big plunge Monday and Friday.
“This is, I think, a bit of a mechanical unwinding of a really big trade, which has caused a huge spike in volatility. But for most people, I wouldn’t be recommending abruptly changing positioning or portfolio construction,” Basinger said.
The S&P/TSX composite index was down 292.92 points at 21,934.71, as the Toronto market reacted to the meltdown that occurred on Wall Street and other global markets on Monday while Canadians enjoyed a holiday long weekend.
But south of the border, markets on Tuesday were already showing signs of recovery. In New York, the Dow Jones industrial average was up 483.68 points at 39,186.95. The S&P 500 index was up 94.56 points at 5,280.89, while the Nasdaq composite was up 315.89 points at 16,515.98.
Markets in Asia also stabilized Tuesday.
Wall Street suffered its worst day in nearly two years Monday after several weaker-than-expected economic reports raised worries the U.S. Federal Reserve had pressed the brakes too hard for too long on the U.S. economy through high interest rates in order to beat inflation.
The S&P 500 dropped three per cent on Monday, closing at 5,186.33. The Dow Jones industrial average reeled by 2.6 per cent while the Nasdaq composite slid 3.4 per cent. Apple, Nvidia and other big tech companies saw significant losses.
Investors have been worried that prolonged high interest rates could tip the U.S. economy into a recession before the Federal Reserve begins cutting rates.
But Basinger said he believes what happened Monday was triggered by technical factors, not broader economic conditions.
He said last week’s interest rate hike by the Bank of Japan affected what are called “carry trades.” The term refers to when investors borrow money in a market with low interest rates (in this case Japan) and invest those funds in a market with high interest rates that will yield a better return (in this case, the U.S.).
That carry trade has been profitable for the last couple of years, but an interest rate hike in Japan combined with softer U.S. economic data raising the likelihood of an aggressive rate cut by the Federal Reserve has changed that.
“I think there’s just been a pretty big stampede towards the exit for this carry trade that’s been very popular of the last couple of years, and that is what exacerbated a lot of the market moves and weird nuances that were going on yesterday,” Basinger said.
Now the million-dollar question is whether Monday’s market panic is over, or whether there is still more money that needs to come out, he said.
“If this is a mechanical situation where it’s an unwinding of a trade, then that will limit how much it can actually spread,” he said.
“I think you could possibly get some normalcy back in the market. The only risk, of course, is that these were really big moves — there could be some institutions that are sort of further offside now or in greater trouble.”
The Canadian dollar traded for 72.53 cents US compared with 72.16 cents US on Friday.
The September crude oil contract was up 50 cents at US$73.44 per barrel and the September natural gas contract was up five cents at US$2.00 per mmBTU.
The December gold contract was down US$16 at US$2,428.40 an ounce and the September copper contract was up three cents at US$4.03 a pound.
This report by The Canadian Press was first published Aug. 6, 2024.
With files from The Associated Press