The fall of 2008 was a period of unprecedented volatility in world equity markets.  Investors in Canada and around the world saw significant change to their portfolio value, sometimes in a single day.  It goes without saying that September and October have been devastating for equity markets in Canada and around the world. A severe credit crisis, growing global economic concerns and an evaporation of investor confidence initiated and compounded a sell off in stocks we haven’t seen for some time.  Let me quickly highlight the main sources of weakness that have brought us to where we are today.

The Credit Crisis

We’ve known about the “credit crunch” for over a year now as the U.S. sub-prime mortgage market has wreaked havoc on Financials since 2007. However, this one component of the credit market has evolved and expanded into other areas leading to multi-billion dollar write offs and constrained liquidity. The effects became so widespread that investors witnessed the demise of market powerhouses such as Bear Stearns, Freddie Mac, Fannie Mae, AIG Group, and Lehman Brothers. Unfortunately the collapse of one firm had a domino effect on other firms, thus constraining capital further resulting in the unwillingness of many financial institutions to lend to each other.

Economic Concerns

Growing economic concerns have hit Canadian markets particularly hard as Energy and Materials stocks make up approximately 40% of the TSX Index. The perceived decline in demand from an economic slowdown has impacted commodity prices, thus sending stocks in the resource space dramatically lower. Even with the credit problems faced by the U.S., it’s growing debt levels and lower consumer spending, investors are still moving money into U.S. treasuries for safety, thus propping up the U.S. dollar and putting further downward pressure on commodity prices. Growing economic concerns and a stronger U.S. dollar have only hurt the Canadian market since the end of August.

Forced Selling

Fundamentals have meant little to investors during the recent sell-off. The market couldn’t care less about analyst recommendations, target prices or earnings estimates. What’s important to remember though, when fundamentals mean little, is that selling not only occurs because investors want to sell, but also because they have to sell. Hedge fund collapses and redemptions have had a material impact on stock prices. Such selling pays little attention to the price received and more attention to getting proceeds to pay out investors. For that reason the magnitude of price declines has been magnified and volatility has been exceptional.