A bear market is usually defined by a drop in the stock market of 20% or more. If that’s the case, the Toronto Stock Exchange (TSX) is in bear-market territory. And the resource-heavy TSX will not experience a sustained rebound until economic conditions change. As a result, the Canadian markets will remain on shaky, volatile ground. That doesn’t mean there isn’t a way to play the volatility and chaos. There is. There are a number of proven investing strategies that can help investors profit no matter what the stock markets are doing.
Resource-Heavy TSX Already in Bear-Market Territory
North American equities are getting hammered on growing fears of a global economic recession and weak commodity and energy prices.
The S&P 500 (an American stock market index that stands on the total market values of 500 companies listed in the New York Stock Exchange) is down almost 10.0% since the beginning of December, 2015, and is down 7.5% since the beginning of this year. The 30-large-cap strong Dow Jones Industrial Average is down 10% since the beginning of December and 8.0% since the beginning of January.
That’s nothing compared to the resource-heavy TSX. Since April of last year, the TSX has plummeted 23%. More recently, the TSX is down 11.0% since December 1, 2015 and 7.0% since the start of the year.
Currently near 12,050, the TSX is at its lowest levels since July 2013. If you take a longer-term look at the TSX, it has erased all gains since 2006 and these years are being considered a “lost decade” for Canadian equities.1
Volatility Continues with China, Germany, and Japan in Bear Markets
What Canadian investors are experiencing today is not a national phenomenon. Stock markets around the world are feeling the same thing. In England, the FTSE 100 (similar to the S&P 500 except these are companies listed on the London Stock Exchange) has officially fallen into bear-market territory. The list of the U.K.’s 100 biggest publicly-traded companies is down more than 20% from a market high in April 2015.
China’s stock market plunged into bear-market territory and has pulled much of Europe and Japan with it. France is in bear market territory, so too is Japan’s Nikkei index. Germany, the largest economy in Europe, entered bear market territory in the first week of 2016. And France, the second biggest economy in Europe is in bear market territory.
How Did We Get Here?
An economic slowdown in China, the world’s second biggest economy, is being felt around the world and is negatively impacting global financial markets. For example, Japan exports roughly 20% of its goods to China, and China and the U.S. are Germany’s biggest trading partners outside of Europe.
When China—the world’s biggest consumer of metals and one of the biggest importers of oil—announces its slowest growth in a quarter of a century, the world markets suffer.
The World Bank forecasts the global GDP to be just 2.9% in 2016, down from previous guidance of 3.4%. It also predicts U.S. GDP will expand only 2.5% in 2016 with European growth of 1.7% and 1.3% in Japan.2
Locally, the International Monetary Fund downgraded its growth predictions for Canada, stating that the country’s expected to grow by just 1.7% in 2016 and 2.1% in 2017. The IMF cited economic challenges in China, plummeting oil prices, and the U.S. dollar increasing as the main culprits.3
And until the global economy rebounds, the TSX and global markets will likely remain volatile.
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- “TSX Posts Triple-Digit Loss Amid ‘Lost Decade’ For Canadian Stocks,” Huffington Post Business, January 20, 2016; https://www.huffingtonpost.ca/2016/01/20/tsx-lost-decade_n_9032888.html?utm_hp_ref=canada-business&ir=Canada+Business.
- Global Economic Prospects,” The World Bank, January 6, 2016, https://www.worldbank.org/content/dam/Worldbank/GEP/GEP2016a/Global-Economic-Prospects-January-2016-Spillovers-amid-weak-growth.pdf.
- Flavelle, D., “IMF downgrades Canada’s economic outlook,” thestar.com, January 19, 2016; https://www.thestar.com/business/2016/01/19/imf-downgrades-canadas-economic-outlook.html.