Canada Stocks Drop, Heading Toward First Correction Since 2020

Canadian stocks are on pace to enter correction territory for the first time since the early days of the Covid-19 pandemic as investors exit risk assets on concerns about aggressive rate hikes and economic growth, according to Bloomberg.

The S&P/TSX Composite Index fell as much as 1.3% on Tuesday, extending its decline for a fourth day after Federal Reserve Bank of Cleveland President Loretta Mester said 75 basis-point rate hikes cannot be ruled out forever. The selloff puts the TSX on pace to fall more than 10% from its record closing price reached on March 29.

Commodity producers, financial stocks and tech were among the biggest drags on the index Tuesday. Suncor Energy Inc. and Enbridge Inc. declined 4.4% and 2.2% respectively, while Shopify Inc. fell 3.3%. Bausch Health Cos. also weighed on the TSX, sinking 26% after the company reported first-quarter earnings that largely missed analysts’ expectations.

“Market psyche has shifted from concerns about rising interest rates into a broader base selloff due to fears of a hard landing or recession,” Mackenzie Investments chief investment officer of equities Lesley Marks said in an interview.

The Canadian market has so far staved off the steep losses seen in the U.S., falling 7% this year compared with the 17% drop in the S&P 500 Index. Investors had been piling back into commodities stocks -- which make up about a third of the index -- as markets reeled from a tight oil market, economic growth uncertainty and a rising interest rate environment.

With nearly half of Canadian companies set to report in the coming weeks, analysts are bullish on earnings, estimating a 30% climb blended forward 12 month average earnings per share. Canada’s Big Six banks, making up about 20% of the benchmark, are set to report in late May. Financial stocks have dropped about 4.2% in the past four days.

“The TSX has significantly outperformed the S&P because of its high exposure to energy and low exposure to technology,” Marks said. “We think that that is sustainable. Canadian stocks will have a better relative earnings momentum overall, Canadian stocks trade at significantly lower valuations and the Canadian market is well supported by the strong commodity prices.”