Prospect of rate hikes and conflict in Ukraine have investors fleeing for safety
Stock markets slumped further into the red on Monday, as investors were washed over by a wave of fear and uncertainty about what could be coming to the global economy.
Major U.S. stock groupings such as the Dow Jones Industrial Average, the S&P 500 and the Nasdaq all entered official correction territory, which means they have declined by at least 10 per cent from their recent peaks.
Early in the afternoon, the Dow was off by 800 points, or more than two per cent, the broader S&P 500 was down by slightly more, and the tech-heavy Nasdaq was faring worst of all with a decline of 2.7 per cent — down 15 per cent since the start of the year.
The catalyst for the selling were worries that stock prices had gotten ahead of themselves, in conjunction with dark clouds on the horizon in Ukraine (new window) and potential rate hikes coming from central banks.
What really sparked the sell-off today is the fact that we seem to be marching inexorably towards a full-scale invasion of Ukraine by Russia, Dennis Mitchell, CEO of Toronto-based investment firm Starlight Capital, said in an interview.
That development would be especially tumultuous for energy markets, since Russia is a huge supplier of oil and natural gas to Europe.
If you have a full-scale invasion with bombs dropped ... there's a high likelihood that transmission of gas from Russia to Europe is going to be interrupted.
TSX swept up in sell-off
Energy companies feature prominently on Toronto's stock market, so Canada's benchmark index felt that uncertainty acutely. The TSX was on track for its worst day in months, down more than 600 points, or three per cent, at one point.
It dipped below the 20,000-point level for the first time since last July on Monday. In November, the TSX hit an all-time high of 21,796 points. At one point on Monday, it had fallen almost nine per cent from that level.
Shares in technology companies that had been soaring earlier in the pandemic as consumers shifted their habits toward online activities are now getting crushed, as investors move money to sectors seen as safer and more defensive.
Shopify, which passed Royal Bank to become the most valuable company in Canada (new window) last year, has since lost more than half of its value. Payment firms like Nuvei and Lightspeed have seen their share prices lose more than two-thirds of their value since the fall.
For many tech companies, multiples and valuations are certainly high in a lot of instances, and so if you don't deliver the earnings to justify the valuation, there's room for continued and further corrections, said Darren Schuringa, chief executive officer of ASYMmetric ETFs in New York.
Stock markets have run up huge gains in the pandemic mostly on the backs of massive tech companies like Facebook, Amazon, Microsoft and Apple. Now that the tech sector is under pressure, there isn't a lot left to keep markets heading higher — especially against the backdrop of higher interest rates.
The sector is still as vulnerable to an increase in interest rates as it's ever been, said Michael Casper, an equity analyst with Bloomberg Intelligence.
Software companies are the most at risk if rates rise, while tech hardware and equipment companies could be affected least.
Three major tech companies are set to reveal their quarterly earnings this week, and any negative news buried in the numbers is likely to prompt more selling. Microsoft reveals quarterly numbers on Tuesday, followed by Tesla on Wednesday and Apple on Thursday.
Inflation has soared in most developed economies, to the point where central banks are expected to start hiking their interest rates to try to tame it. The Bank of Canada could start doing so as soon as this week.
Broadly speaking, rate hikes are bad news for stock markets as they increase the cost of borrowing, which is a drag on corporate earnings.