GlobeinvestorGOLD (TORONTO) - If the stock market continues to hold to its historic pattern as a leading economic indicator, it's going to be a long, bleak winter for Canadians. No wonder Stephen Harper is so anxious to get to the polls!
In the space of less than three months, the Toronto Stock Exchange has gone from being the number one performer in the world to the global "Worst Ten" list. It seems like a decade ago but in fact it was only in mid-June that the S&P/TSX Composite Index hit an all-time high of 15,154.77 as we rode the commodities boom.
Today we stand on threshold of an official bear market. As of Friday, the Composite Index was down more than 15 per cent from that lofty June peak. A retreat of 20 per cent or more is considered to be a bear market.
If you want a little good news, the TSX still has the best record on the planet in 2008, with a year-to-date loss of 7.3 per cent as of Friday's close. Every other market of any significance shows double-digit declines and in many cases (e.g. Germany, France, and Hong Kong) the losses exceed 20 per cent. But that's small consolation in the context of what's been happening in Toronto recently.
How long can this go on? To be honest, there's no way to predict that. What we do know based on past experience is that severe market corrections are usually followed by a recession within about six months. If that holds true once again, the first half of 2009 will not be a happy time. Here's what we might expect.
Job losses. Despite the mildly cheering August employment news from Statistics Canada, the winter will likely bring more layoffs and plant closures especially in eastern Canada. If the price of oil continues to tumble, we might also see a reduction in labour demand in Western Canada, over and above the usual seasonality in the energy sector.
A decline in house prices. We have already had indications that the Canadian housing market is softening. This trend could accelerate as we move through the fall and winter although it won't be anywhere near as bad as in the United States because of our stricter lending standards. Based on historical precedent, the greatest impact is likely to be felt in regions that have experienced unusually high increases in property values in the past few years. Condos in overbuilt markets are especially vulnerable.
Lower interest rates. As unemployment rises and housing prices drop, the Bank of Canada will finally get off its backside and start cutting rates again. Governor Mark Carney and company should have started the process on Tuesday but instead held steady at 3 per cent, in part because of lingering inflation concerns.
Lower energy prices. We have not yet seen the full impact of falling oil prices at the gas pumps and on our home heating bills. But if the price slips below $100 (U.S.) a barrel and stays there, we should see gasoline back at around $1.10 to $1.15 a litre by late fall. That would have a ripple effect right through the economy which could result in deflation replacing inflation as the Bank of Canada's primary concern.
A government deficit. The probability of this happening is low but it is a concern if the economy hits the skids over the winter. Remember, the government's accounts were in deficit in the first two months of the 2008-2009 fiscal year, which began on April 1. Although Ottawa moved back to a surplus in June, the overall economy appears to have deteriorated since.
A stock market rally. Just when things couldn't seem worse, the stock market will take off and a new bull will be born. At the time, the economy will still be weak but investors will be looking ahead to the recovery stage and will be snapping up bargains everywhere. That's the way it's always been. It won't be any different this time.
written by Gordon Pape
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