TSX leads the way lower as global markets sell off Article Comments JOHN HEINZL Globe and Mail Update March 3, 2009 at 6:00 AM EST

Canada may boast healthy banks, a fiscally sound government and a relatively stable housing market, but they weren’t enough to keep its stock market from suffering its worst drop of the year yesterday as the deepening global recession snuffed any momentum that was building in recent days.

In a selloff that was as broad as it was deep, the S&P/TSX composite index plummeted 435.51 points or 5.4 per cent to 7,687.51, dragged down by declines in energy, materials and financials. The drop, one of the worst among major global markets yesterday, easily eclipsed the 4.2-per-cent skid for the Dow Jones industrial average, which fell below 7,000 for the first time since 1997. The MSCI world equity index fell 2.1 per cent to its lowest level since April 2003.

"The overweight of energy and materials on the Toronto Stock Exchange certainly plays into the fact that it’s down more," said Art Hogan, chief market analyst at Jefferies & Co. in Boston. "It’s concern about the global economic slowdown" that is battering Canadian stocks, he said.

And it may be a prelude to more bloodletting, particularly if investors open their dismal February statements and decide to get out of stocks rather than suffer more losses.

"I think some people are going to look at their February statements with horror," said Andrew Martyn, vice-president at Davis-Rea Ltd. in Toronto.

Worries about the rapidly deteriorating Canadian economy intensified yesterday after Statistics Canada said gross domestic product contracted at an annual rate of 3.4 per cent in the fourth quarter. The sharp decline in GDP will turn up the heat on the Bank of Canada to chop its benchmark interest rate today from its record low of 1 per cent.

As bad as yesterday’s selloff was, some money managers predict there is worse to come. Last week, Canadian stocks rallied, spurred by better-than-expected bank earnings that underlined a belief that the country’s financial system is among the strongest in the world. However, as yesterday’s near-panic selling demonstrated, investors are quick to dump their winners at the first sign of trouble.

"It was a relief rally and that was it. People just said, ’Oh great, nobody blew up.’ And then reality set back in again, reality being that the outlook for financials around the world continues to deteriorate," said Norman Levine, managing director of Portfolio Management Corp. in Toronto.

The worsening outlook was underscored by American International Group, which posted a loss of $61.7-billion (U.S.) - the biggest quarterly loss by a U.S. corporation - and by General Electric, which late last week cut its dividend for the first time since 1938. In Canada, fears that Manulife Financial Corp. may have to raise additional equity to cover investment losses sent its stock down 10.2 per cent.

"I think we’re going to meet face to face with some really nasty bankruptcies here in Canada," Mr. Martyn said. "I think the banks are going to yank a lot of liquidity from people that are iffy."

But Mr. Hogan thinks the market may be getting close to a bottom, because investors are dumping stocks indiscriminately.

"That’s very typical of the action you see when you start the bottoming process. What everyone looks for is that capitulation, and we certainly seem to be working up to that crescendo right now."