Historic Stock Market Drop Exposes Canada’s Economic Fault Lines

(Bloomberg) -- Never in modern trading history have Canadian stocks fallen so much in a single day of trading as they did this week.

Growing alarm over the coronavirus and plummeting oil prices have been catalysts for the slump. But one historian sees two underlying factors at play: a fractured geopolitical environment that has coincided with market volatility the world over, and Canada’s thin corporate base.

While the S&P/TSX Composite Index clawed back some of its lost ground on Friday, it is still down 24% from its record high on Feb. 20. The decline this week alone included two harrowing drops of 10% and 12%. The latter, on Thursday, was the biggest one-day percentage decline since at least 1977 when the first major index on the exchange was launched.

The volatility hasn’t been surprising to Dimitry Anastakis, a professor at the University of Toronto’s Rotman School of Management who’s studied market ebbs and flows. From the 1940s to the late 1980s, a generally stable political environment provided the basis for a long-term rise in equities, he said.

“We’re in the cold war and there’s U.S. internationalism in the free-market countries that dictates a market that’s delivering pretty solid, steady returns,” said Anastakis, who holds the L.R. Wilson/R.J. Currie Chair in Canadian Business History. “It’s the bipolar world that leads to stability.”

Like Snowmageddon

With the break up of the Soviet Union starting in the early 1990s, politics has become more polarized and volatile, as have markets. The inclines have become sharper. So have the slumps.

Anastakis points to the Mexican peso crisis, Russian default, the Long Term Credit Management debacle, the tech wreck and the 2008 financial crisis as some of the shocks that have wracked markets over that time.

The democratization of the stock market and advent of 24-hour business news has only inflamed the volatility, he said. “I know this is going to be a terrible analogy but it’s kind of how the weather channel freaks people out every time there’s a snowmaggedon,” Anastakis said. “It puts us on this roller coaster.”

While these new factors are affecting all stock markets, Canada has its own Achilles heel -- a big weighting to the energy industry in the index. At about 13%, down from 15% since the rout, it is the biggest in the Group of Seven.

Historic Stock Market Drop Exposes Canada’s Economic Fault Lines

That has swelled as the country’s manufacturing base has shrunk. Unlike in the U.S. where technology has become a mighty force, there hasn’t been a lot to take its place. Canada’s economy has been driven by a consumer and spending boom for years with productivity middling and few companies of much substance listing on the stock market.

Anastakis noted that oil was tumbling this week as Bombardier Inc. replaced its chief executive officer, the latest chapter on the company’s dramatic retrenchment which has seen it cede its marquee jet program and sell off its rail business.

“I was in my MBA class talking about it saying, this is bleak,” he said. “The last kind of international manufacturing entity of real substance in Canada is probably Magna,” he said referring to the Aurora, Ontario-based auto parts maker.

Anastakis believes the hit to globalization from the coronavirus and U.S. President Donald Trump’s tariff war may permanently change the way economies and societies function. “As quickly as we create networks, they can be destructed,” he said.

But markets? They will soldier on, he said.

“If you look at the market over last 80 years, it’s still a positive story,” Anastakis said. Growth usually emerges from some corner of the market no one expects. Few would have foreseen, for example, the success of the FAANG companies -- a group of technology giants including Facebook Inc. and Amazon.com Inc. -- in the wake of the dot-com bust of 2000.

Historic Stock Market Drop Exposes Canada’s Economic Fault Lines

Canada has produced one new growth star in technology, Shopify Inc.. But that isn’t enough. Since the bottom of the market during the financial crisis in 2009, the S&P/TSX has returned about 150% including dividends compared with the S&P 500’s 400% gain.

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