Increases in stock market volatility caused concern for many over the past few days, but from a local perspective, these market changes could signal good news for the province.
On Monday, the benchmark Dow Jones industrial average had its largest one-day drop in history, losing 1,175 points, or 4.6 per cent, in one day of trading. By Tuesday, bargain hunters who bought some lower-priced stocks caused the Dow index to stabilize, with many analysts calling it a trader’s paradise.
The sudden increase in volatility was a shock to some, but not to Larry Short, who is portfolio manager and executive director for HollisWealth in St. John’s. He says this is normal market movement, whereas what we’ve seen over the past six months is abnormal.
“The U.S. market has gone up 20 per cent inside of six months — that’s highly unusual,” Short told The Telegram Tuesday. “And for it to give back seven or 10 per cent is not unusual.”
Short says it is normal to see a 10 per cent fall in stock markets about three times a year, but that hasn’t happened recently, so the volatility over the past few days is considered a correction. Even more, he says it could mean good things for the local economy.
When there is a major stimulus to the economy like what has happened in the United States with low unemployment paired with large cuts to taxes, inflation starts to pick up.
"This then causes concern that interest rates are going to start to rise in the U.S., and when interest rates go up, generally speaking, stock markets tend to fall ... that’s basically what happened on Friday, was an indication of inflation in the United States."
“Locally, this is good news, strangely enough,” said Short. “Because inflation drives up the price of commodities.”
Short points to several commodities that the provincial economy relies on, such as nickel and iron ore, and says companies such as Vale would like to see inflation because that would push up the price of commodities.
“It means that if indeed the price of commodities start to rise, then you’ll start to get mines opening up and maybe we might get more value out of the iron ore mining in Labrador, and that would mean more tax revenue for the province, it would mean more employment for the province.”
“And if indeed this inflation continues, and we get commodity prices continuing to rise, you get more exploration happening, and the potential for opening up new mines and finding new deposits in the province.”
He admits it is more medium- to long-term change, but that it could be a “significant change in the overall economy” that has not benefitted from the same growth in industries such as pharmaceuticals and technology like the United States.
“But Canada does have a lot of mines and minerals,” he said.
However, the good news does come with one caveat: an increase in interest rates also means increases to mortgage rates. Short suggests people consider locking in rates if they currently have a variable rate mortgage.