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(Reuters)
By Leah Schnurr
TORONTO (Reuters) - Worries over dismal global growth along with sliding oil prices have sent Toronto stocks reeling in the first days of September, and analysts warn the market may have further to fall before it finds its footing.
Just three months ago, the Toronto Stock Exchange was the envy of most major markets as it catapulted to record highs on the back of surging commodity prices, which helped it overcome the economic fears and financial-sector disasters that have taken down its peers.
But since its peak in June, the S&P/TSX composite index has been trending steadily lower, taking its cue from declines in the commodities such as oil and gold that it is closely tied to.
But this week's abrupt dropoff of more than 950 points speaks to more than just weakening commodities, analysts say. Worries over declining demand for resources, slowing global growth and the tight credit situation have converged to knock the confidence out of the market.
"Everyone is literally ready to throw in the towel," said Joe Ismail, a technical analyst at Maison Placements Canada.
Ismail said he would not be surprised to see the TSX retest or even fall below its January lows, when the composite index skidded more than 11 percent, or a stunning 1,566 points, over the course of just five days.
By comparison, Bay Street shed nearly 7 percent in the first four days of September, a month traditionally viewed as being one of the worst for stock markets.
Analysts agree that the TSX is likely to see a short-term relief rally in coming days as the cheap stock prices tempt bargain-hunters back into the fray.
Indeed, after falling more than 2 percent early on Friday, the benchmark was able to claw back its losses to eke out a tiny gain of 2 points -- its best day in a dismal week that was characterized by triple-digit declines.
But with sentiment so overwhelmingly negative, market watchers expect stocks to continue to be pressured to the downside in the long run, making it a case of one step forward, two steps back.
"Every time the market will advance a few hundred points, you will trigger the sentiment of moving to cash, and that will continue for a while longer," said Ismail.
While no sector has been safe from the latest onslaught, the resource groups have shouldered much of the selloff, as they account for more than half the TSX index.
The oil and gas group has declined about 10 percent, continuing its retreat from a peak reached in May. The sector has been stung by weakening crude, its key underlying commodity, which has tumbled from a record over $147 a barrel in mid-July to settle at $106.23 on Friday, as worries over stalling demand have emerged.
The materials sector, home to miners and other resource companies, also gave up more than 10 percent this past week.
But the financial sector could emerge as the market's bright spot if it is able to expand on the gain of about 15 percent it made from mid-July to the end August.
Banks have been hammered in the past year by writedowns related to the credit crunch, and worries of more to come. But Canadian financial institutions have escaped the worst of the global fallout from the U.S. mortgage meltdown, and been buoyed by recent quarterly results that were not as dire as some had anticipated.
However, analysts think it is unlikely the financials group will be able support the TSX on its own and investor confidence will have to return to both the banks and the wider market before the TSX can post gains with some staying power.
Investors will have to see signs of resiliency in the global economy, as well as clear indications the worst of the credit crunch is past before their faith is restored.
"I think we're heading toward a global slowdown and that weighs pretty heavily on the confidence level," said Adrian Mastracci, portfolio manager and president at KCM Wealth Management Inc in Vancouver.
"Markets are about a couple things, one of which is confidence and one of the others is earnings -- and we're short on both."
(Editing by Rob Wilson)
