Stocks set for more volatility, long anticipated correction may have arrived

North American stock markets are likely in for another dose of steep declines this week amid concerns about interest rates, geopolitical unrest and whether a lengthy bull market is set for a long-anticipated correction.

Markets plunged last week as the TSX fell 240 points or 1.55 per cent, leaving the index still up 11.8 per cent year to date. However, the Dow industrials dropped 467 points or 2.75 per cent this week, wiping out all gains year-to-date.

The selloff seemed to be triggered by data mid-week showing the American economy grew at a much better expected annualized pace of four per cent during the second quarter following a 2.1 per cent contraction in the January-March period. That raised concerns that the Fed could move on raising rates sooner than thought, despite the central bank reassuring markets that short-term rates will be ultra-low even after it ends its program of buying bonds, likely in October.

“The Fed is incredibly influential on markets,” said John Stephenson, president and CEO at Stephenson and Co. Capital Management.

“And the truth of it is the central bank has unlimited ability to buy assets, to effect monetary policy. And because they’re analyzing data from all these regional Feds, what their view of markets and economics is is hugely followed, so the aggregate end result is it is absolutely significant.”

Other issues discouraging buyers at the end of last week was uncertainty over the effects of Argentina again defaulting on debt and how sanctions levied against Russia for its support of Ukrainian rebels could impact the European economy.

“It‘s certainly not a world without issues,” added Stephenson.

But there is also the strong feeling that it is time for a correction on markets that are close to record highs. The TSX has been playing catchup following a dismal showing last year but had been up as much as 15 per cent year to date. And U.S. markets haven’t had a correction in years.

At the same time, Stephenson thinks that while “we will have a correction”, it’s not expected to be major.

“Maybe three or four per cent, in that range,” he said.

“Will it be much more than that? I think not, because over all, the economy in the U.S. particularly is improving. It’s been pretty strong and so, in general, I’m kind of bullish on the economy. But frankly, they are all worried out there, for sure.”

Meanwhile, the Canadian earnings season remains in high gear with reports out this week from a variety of major corporations, including Tim Horton’s (TSX:THI), telecoms BCE Inc. (TSX:BCE) and Telus Corp. (TSX:T) and retailer Canadian Tire (TSX:CTC.A).

One sector of particular interest are the insurers — three majors report including Great West Lifeco (TSX:GWO), Manulife Financial (TSX:MFC) and Sun Life Financial (TSX:SLF).

Insurers were a major casualty of the 2008 financial crisis as gains in stock markets withered and bond yields sank.

But now they are close to 52-week highs and “we are starting to get new interest in the Canadian insurers,” said Colin Cieszynski, senior market analyst at CMC Markets Canada.

“So, if you get support of earnings that should be supportive for the stocks (as) they are just starting to break out. They don‘t look ridiculously overbought, even though they‘re at 52 week highs they‘re coming out of a big consolidation period and they‘re just starting to move higher again.”

Another stock with high expectations is Air Canada (TSX:AC.B), which also reports this week.

Investors will look to see if strong earnings can give this stock extra lift. It’s already put in a ballistic performance, surging 350 per cent from its 52-week low of $2.07.

“But I think this is mainly a cyclical play,” added Cieszynski.

“We’ve seen this play out in many other airlines over the years how when times are good they do amazing and when times are bad, they do really badly.”

Air Canada returned to the public market in in late 2006 after a court-supervised restructuring and about two years as a wholly owned subsidiary of ACE Aviation. Air Canada stock closed Friday at $9.30, less than half what it was worth when it started trading at $21 on Nov. 17, 2006 but up from $2.40 at the beginning of August 2013.

On the economic front, the major report this week is the Canadian employment report for July which comes out on Friday. Economists expect that about 25,000 jobs were created during the month.