Stock markets swoon as reality of rising rates sets in

North American stock markets were sharply lower on Wednesday as fears of higher interest rates to come took the wind out of the sails that had been powering returns in recent years.

TSX moves lower for fourth day in a row

The Dow Jones Industrial Average was down by more than 600 points at one point on Wednesday. (Richard Drew/Associated Press)

The TSX and Dow Jones were sharply lower on Wednesday as fears of higher interest rates to come took the wind out of the sails that have powered stock market returns for years.

The Toronto Stock Exchange closed down 336 points, or more than two per cent, on Wednesday, the fourth day in a row that the benchmark Canadian stock index was lower. 

Every subsector on the TSX was lower, from the banks, to energy, to health care names, retailers and other consumer staples.

Oil prices were lower, with the U.S. benchmark West Texas Intermediate losing almost $2 to trade at just over $73 US a barrel. Canadian crude oil, known as Western Canada Select, is even cheaper, at barely over $26 US a barrel. That puts the gap between the two oil prices at its highest level on record, which is weighing heavily on shares of Canadian oil companies.

"There's just no demand for this heavier Canadian crude, and you can't get it to refineries" says John Zechner, chairman of Toronto-based money manager J. Zechner Associates. 

In the U.S. the losses were even steeper.The Dow Jones Industrial Average was off by 818 points when markets closed, or more than three per cent. The broader S&P 500 was down by even more, and had its worst day in more than six months.

The technology-focused Nasdaq fared worst of all, losing more than four per cent. A lot of that was because of the so-called FAANG stocks — technology names such as Facebook, Amazon, Apple, Netflix and Google — flying into turbulence on Wednesday.

"As stocks go up, tech goes up more than the stock market," said Gina Martin Adams, chief equity strategist for Bloomberg Intelligence. "As stocks go down, tech goes down more."

The catalyst for all the gloom is the prospect of higher lending rates. The U.S. central bank hiked its rate at the end of September, and Canada is expected to follow suit at the end of the month.

Fear over higher rates is being best expressed in the bond market where prices have slid lower for weeks. Higher rates make current bonds less attractive than future ones, which will come with higher yields. It's also bad news for stocks as that means it will get more expensive to borrow money to invest.

Market watchers have been expecting yields to start slowly moving, but it seems to have caught some off guard.

"Investors missing this rate move is tantamount to letting yourself get run over by a glacier," said Mike Terwilliger, portfolio manager of Resource Liquid Alternatives for the Resource Credit Income Fund in New York.

Zechner says after booming for so long, stock markets tend not to rise forever and markets historically correct before the broader economy does.

"Rising interest rates in the U.S. ... are suddenly becoming much more of a concern and people are paying attention," he said.

He notes that while the U.S. stock market has managed to post gains virtually uninterrupted, that's not the case in most other parts of the world, so that trend may be finally catching up in North America.

"We're seeing cracks in the armour [and] to me it's not why that happened," he said. 

"It's why hasn't it happened sooner than this."

With files from CBC's Meegan Read, Reuters and The Associated Press