Market jitters lead to more declines as investors face growing risks

It's been a shaky month for investors in North American markets.

Tuesday saw benchmark stock indexes register more triple-digit declines — an occurrence that's become all too familiar in recent weeks.

All three major U.S. indexes — the Dow Jones, S&P 500 and Nasdaq — have fallen at least six per cent so far this month. Canada's S&P/TSX composite isn't far behind with a 5.5 per cent decline of its own in October.

Motivations to sell also seem to be increasing, according to analysts.

Everything from geopolitical events to concern over slowing economic growth, disappointing company earnings, and higher interest rates are being blamed for the recent slide in stocks.

Karl Schamotta, chief market strategist at Cambridge Global Payments, said strong growth in the U.S., which has enjoyed one of the longest expansions on record, is "beginning to show its age."  

"The Trump administration's double-barrelled stimulus package is beginning to lose steam — tax cut impact was heavily front-loaded, and historical evidence would suggest that the 'multiplier effect' associated with government spending will diminish quickly," Schamotta said. 

"With the Democrats likely to mount stiff opposition after the mid-terms [elections], markets are increasingly aware that the pork barrel is nearing empty."

Large industrial companies like Caterpillar and 3M, which are considered bellwethers of the global economy, sank more than 5.7 per cent and 4.4 per cent respectively in New York on Tuesday. Their earnings' reports disappointed investors and ignited fears about how rising borrowing costs, wages, and tariffs will affect company results.

Trade protectionism is also playing a bigger role in the markets, according Schamotta. He thinks many companies that accelerated purchases ahead of tariffs are now sitting on excess inventory, and higher supply chain costs will likely be a drag on earnings for many years to come. 

Higher rates hurt liquidity

Added to the slump in stocks, the CBOE Volatlity Index, which measures trading volatility on Wall Street, jumped as much as 25 per cent today to its highest in more than a week.

Bipan Rai, executive director of macro strategy at CIBC Capital Markets, said there are definitely more risks ahead, given that central banks are no longer providing the degree of liquidity that they had been in years past.

"All else being equal, it's the liquidity withdrawal story that is most relevant, considering that is what causes the rate at which future returns are discounted to rise," Rai said.

"Liquidity withdrawal will affect higher premium assets like emerging market assets and global equities first, before they move into other assets. This is a theme that markets will have to deal with in the quarters ahead," he said.

Meanwhile, the Bank of Canada is widely expected to raise interest rates on Wednesday for the fifth time since it started its tightening cycle in July of last year.

Falling oil

Strategists at the Bank of America Merrill Lynch expect the central bank to continue to raise its key lending rate after tomorrow's expected rise until it hits 2.75 per cent by the end of 2019.

Another factor weighing on the Canadian market was declining oil prices, which brought down heavyweight energy shares like Suncor Energy and Imperial Oil.

Crude oil prices fell to their lowest level since September, tumbling more than four per cent in New York, after Saudi Arabia pledged to meet any supply shortfall that resulted from Iranian sanctions.

Alfonso Esparza, senior market strategist at foreign exchange brokerage Oanda, said the bull run in the stock market is at a turning point where it's running out of steam at a time of high uncertainty in world politics.

"The last quarter of 2018 will be packed with market events as central banks are expected to close out the year with major policy decisions, while there are big political events like the U.S. midterms, Italian budget, Brazil elections, etc.," he said.