When Superpower Economies Struggle

At the core of the latest roller-coaster ride is colossal loss of faith in the U.S. markets, both domestically and internationally. Twice in a very short period of time, the world looked suspiciously at what has been going on in the U.S., particularly at what has been going on with the housing and mortgage sectors. And I’m actually being quite generous when I say “suspiciously.” Perhaps it would be more accurate to say that the U.S. subprime lending and the declining real estate markets have been observed in terror, resulting in considerable losses in the stock markets.

Why is everyone watching so intently? Simply, the ripple effect of the world’s largest economy being in trouble is far too great to ignore. Take Canada, for example. Our economy is plugging along just fine, to the point that the Bank of Canada has recently raised interest rates in an effort to slow down the economy and curb inflation. And more rate increases could be in the cards, too.

However, selloffs that have hit global markets in the last couple of weeks are indicative that something could be fundamentally wrong with the financial world as we know it. Even one of the most stable world economies, Canada, has been caught in the whirlwind, which makes me think that the Bank of Canada’s increasing interest rates may have been premature. Considering the financial health, or lack thereof, of our largest trade partner, we may need all the gains our economy produces to offset whatever is potentially wrong south of the border.

To make matters worse, seeing a sort of a pattern developing has been worrying analysts and investors alike. Namely, recent selloffs were anything but idiosyncratic summertime panics. Rather, considering aggregate volumes of those selloffs, which were significant, traders were obviously working the phones in a frenzy and not lounging somewhere nice and relaxing (as is usually the case during the dog days of summer). To illustrate, both the Toronto Stock Exchange and New York Stock Exchange have set record volume highs in the last couple of weeks, as significantly more stocks were sold than bought.

Some of my readers will say that the markets went through something similar in late February and early March of this year. True, we experienced a correction then. However, that was a true correction, a sort of collective let’s-take-a-breather type of thing. In contrast, what has been going on in the last couple of weeks was not a consequence of merely prudent correction and mild profit taking… quite the contrary. I have a nagging feeling we are talking about a brushfire that won’t be easily contained, if at all!

Canadian markets may have a break here and there, such as more exposure to resource stocks and investors relying more on fundamentals, instead of engaging in short-term profit gluttony. Still, while the Canadian markets may not have been as hard hit as the markets in the U.S., we will get hit going forward, as we wait with the rest of the world for the mess in the U.S. to unravel one way or the other!