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Losses grow as markets extend slide

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The Toronto stock market continued its losing ways, sliding for a seventh-consecutive day, amid worries that the global economy is slowing.

U.S. stocks have also been under pressure, and finished Wednesday down for the sixth-straight session, the first time they've had such a lengthy losing streak since February, 2009.

So far, most analysts view the downturn, which has taken the S&P/TSX Composite index off a total of 4.6 per cent, as a healthy correction, rather than as a foreshadowing of another bear market. The index closed Wednesday at 13,184 points.

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While shares are now down about 1,100 points, or 7.7 per cent, from their high in early April, that is nowhere near the 20-per-cent drop commonly accepted as the threshold of a bear market.

"My sense is that it's just a correction, a mid-cycle change of gears," observed Tony Boeckh, a Montreal money manager and newsletter writer.

He says stocks have enjoyed one of the biggest bull markets in history in the two years since the 2009 market crash. "After that kind of run, you have to expect a correction," he says.

The investors who have been selling stocks are reacting to several concerns.

One problem is that commodities producers, a major component of the Toronto exchange, have been weakening over the past month in response to a slew of readings suggesting the U.S. economy is slowing. China, a big consumer of commodities, has also been trying to curb its growth to tame inflation.

The European sovereign-debt crisis, and the possibility that some countries may default on their loans or abandon the euro, is weighing on sentiment. There are fears, too, that the U.S., with its huge deficit, may eventually find itself fighting solvency jitters.

Too Early to Panic

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The long list of worries exacts a psychological toll on investors. "When you get into this corrective period then all the bearish stuff starts to come out and people start to dwell on it," Mr. Boeckh said.

While Mr. Boeckh believes the correction may have further to run, he says it's too early for investors to press the panic button.

He says the recent drop in commodity prices, while it has hurt the Toronto market, has an upside. It should reduce inflationary pressure, a long-term plus.

Mr. Boeckh adds that governments and central banks want to avoid a renewed recession, a condition that would likely trigger another bear market, so they will likely keep interest rates low, which is good for stocks and corporate profits.

Policy makers "are totally committed to preventing another recession so they'll do what they have to do to stop it," he says.

Buying on Dips

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John Kinsey, a portfolio manager at Caldwell Investment Management, agrees that the recent decline is merely a correction. He's been using the drop to do some selective buying of higher quality stocks sporting decent dividend yields. "We have been buying some of these on the dips," he says. "We're cautiously optimistic."

Among stocks whose prices have declined recently are Bank of Montreal, which has a dividend yield of 4.6 per cent; CIBC , which sports a 4.5-per-cent dividend yield; and Labrador Iron Ore Royalty , with a 2.9-per-cent yield.

Part of Mr. Kinsey's optimism is based on a view that, while U.S. growth is slowing, economies in the developing world remain strong.

How much downside do stocks have from here?

In a note to clients, Capital Economics predicted the S&P 500, which tracks major U.S. companies, could fall to 1,200 by year end, a decline of about 6 per cent from current levels. The firm says that valuations are high and "equities are likely to struggle even if the economy picks up some steam." The S&P 500 closed Wednesday at 1,280 points.

Capital Economics says the U.S. Federal Reserve Board may undertake another round of stimulus spending, known as quantitative easing, which should help stocks, but such actions are unlikely to take place until 2012, if at all.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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