Stock markets around the world fell on Thursday as investors faced up to the prospect of persistent high inflation, and much higher borrowing costs to fight it.
The Toronto Stock Exchange was off by almost 600 points or about three per cent at midday, with every sector on the benchmark Canadian stock market lower on the day.
Shares in Ottawa-based e-commerce giant Shopify led the way down, losing 16 per cent of their value on the day. The company, which reports in U.S. dollars, announced before markets opened that it lost $1.5 billion US in the first quarter. That’s a reversal from a profit of $1.3 billion US in the same period a year ago.
At one point in the pandemic, Shopify was the most valuable company in Canada, worth more than $200 billion. Today it’s worth about a quarter of that peak, as the company that saw demand for its services explode during the pandemic is now dealing with slowing revenues.
“Easing lockdowns are driving higher consumer spending on in-store retail, services and travelling,” said Daniel Chan, an analyst with TD Bank who covers the company. “These shifting spending patterns are a headwind for Shopify.”
The sell-off was worse in New York, with the Dow Jones Industrial Average off by 1,100 points or more than three per cent, and the technology-heavy Nasdaq faring worst of all, down 600 points or more than five per cent.
Tech stocks hit hardest
Former high-flying tech stocks like Apple, Microsoft, Amazon, Google and Tesla were down by between four and seven per cent on the day.
“Large-cap technology, media and telecom stocks are deflating from their pandemic-bubble peak, but the group still has more air to lose amid rising interest rates and cooling growth expectations,” said Gina Martin Adams, chief equity strategist at Bloomberg Intelligence.
The gloomy mood came on the heels of the decision by the U.S. central bank to raise its interest rate on Wednesday, its biggest single move upwards in 22 years.
That will increase the cost of borrowing, which is bad news for companies and the stock investors looking to buy them. The Bank of England also raised its lending rate on Thursday and warned of “stagflation” to come, which is when an economy is dealing with high inflation, but also slow growth.
John Zechner, chair of Toronto-based investment firm J Zechner Associates, says the sell-off is happening because investors are realizing that lending rates are going to have to get a lot more expensive and quickly, in order to get inflation under control.
“The punch is being pulled away,” he said in an interview Friday. “Free money has sustained this bull market for the last 12 years effectively, and we’re probably seeing the most aggressive move away from free money that we’ve seen in over 20 years.”
“The only way to tame inflation is to is to try to slow down growth or tighten the economy a little,” Zechner said. “And one of the casualties is the stock market.”
The value of bitcoin, which has been trumpeted as a hedge against inflation, slumped along with everything else, losing $3,000 to change hands below $37,000 US. That’s the lowest point for the world’s biggest cryptocurrency since January.
Other cryptocurrencies joined in the sell-off as investors pulled out their cash from the volatile sector and parked it in assets deemed to be safer.
Globally, $120 million US was pulled out of cryptocurrencies in the week up to May 5, according to data from digital investing firm Coinshares. Over the past month, the total jumps to $339 million US.