TORONTO — Canada’s main stock index rallied to end the trading week, but still posted its largest two-day decline in nearly three months led by a continuing selloff of the technology sector.
The correction took place as investors crystalized some profits from the overvalued Canadian sector that is up 81.25 per cent on a 200-day moving average.
The tech-heavy Nasdaq composite has soared as much as 75.7 per cent from the March low and even after this week’s 3.3 per cent pullback remains up 26 per cent year-to-date.
The pullback is a healthy correction because stock prices have run up higher than they were in February before the pandemic and don’t reflect the state of the economy, says Pierre Cleroux, vice-president of research and chief economist for the Business Development Bank of Canada.
“I’m not worried. I think it’s just a slowdown for now. I think these stocks are going to continue to do well for the rest of the year,” he said in an interview.
Technology stocks are favoured by investors because the companies haven’t been affected much by the COVID-19 pandemic. In fact, many have thrived by increased use of technology as more people work from home or have isolated in their homes.
Cleroux urges people to put the correction in perspective.
“This is just a reality check or a small correction and I’m not worried about that because basically we had such good months over the last few months.”
However, he anticipates the downtrend will continue for a few weeks as we’re not out of the economic recession.
Stock markets have been buoyed by large monetary and fiscal stimulus that has cut interest rates to near zero and increased disposable income that has kept retail sales strong.
“It gives investors the feeling that the economy is almost back to normal, which it is not,” Cleroux said.
“We are at 94 per cent of February right now, which is good, but the last six per cent is going to be the toughest to recuperate.”
The phasing out of government transfers is going to make growth slower for the next six months than was the case over the last three.
“I think the fourth quarter is going to be more difficult than the third quarter.”
The jobs numbers for August released Friday were strong on both sides of the border.
Canada added 245,800 jobs in August, most of them full-time, and the unemployment rate fell to 10.2 per cent, from 10.9 per cent in July.
The U.S. unemployment rate fell to 8.4 per cent last month from 10.2 per cent in July as overall employment increased by 1.37 million.
Cleroux said Canada has recovered about 63 per cent of jobs lost in only three months, though he noted the gains were supported by government programs.
“The rest of the recovery in terms of jobs is going to be a slower pace, is going to take a little bit more time.”
The S&P/TSX composite index closed down 230.88 points to 16,218.01 after hitting losing as much as 479.96 points in the day.
In New York, the Dow Jones industrial average lost 159.42 points to 28,133.31. The S&P 500 index was down 28.10 points at 3,426.96, while the Nasdaq composite was down 144.97 points at 11,313.14.
The Canadian dollar traded for 76.40 cents US compared with 76.20 cents US on Thursday.
All 10 major sectors on the TSX were lower, led by technology, which lost 3.3 per cent. All but one of the companies lost ground, led by Absolute Software Corp., which was down 7.9 per cent. Shopify Inc. lost 4.5 per cent.
Materials fell 1.3 per cent with Equinox Gold Corp. and Oceanagold Corp. off 6.2 and 5.9 per cent respectively.
The December gold contract was down US$3.50 at US$1,934.30 an ounce and the December copper contract was up 8.7 cents at US$3.06 a pound.
Lower fuel demand pushed down oil prices, hurting the energy sector. Cenovus Energy Inc. lost 3.5 per cent, Crescent Point Energy Corp. fell 2.3 per cent and Suncor Energy Inc. was down 2.1 per cent in heavy trading of 21.5 million shares.
The October crude contract was down US$1.60 at US$39.77 per barrel and the October natural gas contract was up 10.1 cents at nearly US$2.59 per mmBTU.