‘Keep a cool head’

Two Alberta economists were urging calm on Thursday in the face of plummeting equity markets.

Two Alberta economists were urging calm on Thursday in the face of plummeting equity markets.

Mike Drotar, who is vice-president treasury with Servus Credit Union, and Will Van’t Veld, an economist with ATB Financial, said declining stock markets weren’t necessarily harbingers of another recession.

“I think it’s always better to keep a cool head,” said Van’t Veld.

“The world has gone through numerous crises and this is yet another one,” added Drotar. “It always seems like the world is going to end. It hasn’t yet and I don’t think it will.”

Pessimistic investors had reason to fear financial Armageddon after the S&P/TSX composite index fell 435.89 points to 12,380.13 and the TSX Venture Exchange dropped 112.34 points to 1,853.34. South of the border, the Dow Jones industrial average tumbled 512.76 points to 11,383.68, the Nasdaq composite index lost 136.68 points to close at 2,556.39 and the S&P 500 index was off 60.27 points to 1,200.07.

The numbers were disturbing, acknowledged Drotar, but they don’t compare with the levels reached during the depths of the recession.

“We’re still 39 per cent from the bottom from March 2009,” he said, referring to the S&P/TSX composite index.

Thursday’s sell-off was somewhat surprising since there was no unexpected news to trigger the trend, said Drotar.

“The fundamentals, I don’t think, have really changed a whole lot, in my opinion, from when the TSX was just over 14,000.

“I think it’s a bit of a herd mentality happening.”

He speculated that this mentality was fed by recent bad economic indicators: poor manufacturing numbers from the United States, questions about Europe’s ability to handle the debt crisis there and the sluggish American housing market, among others.

Van’t Veld said Tuesday’s news that U.S. consumer spending had contracted was significant.

“Consumers represent about 60 per cent of the economy, so when that’s not occurring, that has a major impact.”

He also thinks people are worried about debt-ridden governments being forced to implement tough austerity measures — especially overseas.

“In Europe, you have government spending accounting for up to 50 per cent of the entire economy. So when you hear of austerity measures, it’s actually going to have a much larger impact on growth going forward.”

But Van’t Veld agreed that investors’ bearish behaviour on Thursday was largely psychological.

Drotar doesn’t expect another recession, even though the possibility is now a little higher.

“I think by the end of this year we’ll see some positive improvement.”

Van’t Veld also isn’t ready to use the R-word.

“We haven’t seen enough evidence that that’s the case.”

Drotar even went so far as to suggest the stock market sell-off is creating some good long-term opportunities, particularly in the banking and energy sectors.

“At this point there’s some terrific equity evaluations.”

Thursday also brought a steep drop in the September price for crude oil on the New York Mercantile Exchange, to US$86.63 a barrel. But Van’t Veld and Drotar said the number shouldn’t raise fears of job losses in Alberta.

“It’s when oil starts to go down into the $60 range and you start hearing about projects being shelved,” said Van’t Veld.

Drotar agreed.

“It would have to be a prolonged decrease,” he said, adding that such is unlikely given the impact of geopolitical risks on the market and the scarcity of cheap reserves.

hrichards@bprda.wpengine.com