The TSX, Canada’s main stock index, has been the envy of the North American markets with commodities and financial helping propel it to record levels. Those sectors have helped the TSX advance eight percent year-over-year. Over the same period of time, however, the tech-heavy Nasdaq is down 11% and the S&P 500 has slipped 1.5%.
That only tells part of the story, though. While the TSX hit a new record high of 22,213.07 on April 5, some of its daily swings have been quite significant. From April 21 to April 26, the TSX tumbled more than six percent.
What’s Happening with the TSX?
On a year-to-date basis, the TSX is down 2.5% while the Nasdaq has cratered nearly 21%, the S&P 500 has dropped 13.6%, and the Dow Jones Industrial Average has slipped 9.5%.
Stocks continue to face major headwinds from rising interest rates, monetary tightening by central banks, decades high inflation, the war in Ukraine, and ongoing pandemic fears. All of these factors are starting to hit companies’ bottom lines.
Shares in Alphabet and Amazon took a major hit when they reported weaker than expected results. In fact, in April, both companies closed out their biggest monthly drops since the 2008 financial crisis. During the month, Amazon shares tumbled approximately 25% while shares in Alphabet were down 17%.
Those same cross currents are dragging the TSX down too, with the index falling almost six percent in April. This represents the biggest decline in five months and the fifth consecutive month of declines.
The losses are broad based too with all 10 major sectors on the TSX lower. Industrials fell the hardest, down 2.8%, while material lost 2.6% and technology was down 2.5%. Even stalwarts like financials (-2.6%) and energy (1.7%) were weaker.
Will Interest Rate Hikes Help Avoid a Recession?
The Canadian economy may be doing well, but it’s running too hot, with inflation running at a 31-year high of 6.7%. In the U.S., inflation is at a 40-year high of 8.5%. One of the biggest ways for central banks to tame inflation is to raise its key lending rate which juices interest rates.
And central banks around the world are turning more hawkish, as they admit they waited too long to raise their rates. Now they have to play catch up. Which means bigger than normal interest rate hikes.
The Bank of Canada recently raised its rates by half a point to one percent. And even larger hikes could be coming. The Federal Reserve has been raising its rates too. The big question is whether central banks will be able to engineer a soft or hard landing. A hard landing means a recession.
It’s not an easy task. Central banks have to raise borrowing enough to slow growth and tame inflation, but not so much that it pushes the economy into a recession. History is not on the side of central banks.
Over the last 14 interest rate hiking cycles, 11 have ended up in a recession. Moreover, a new study from the Centre for Economic Policy Research (CEPR) found that when inflation climbs above five percent, the odds of a recession over the next two years rises to above 60%.
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