(Reuters) - Canadian stocks, which slumped to a 2012 low last week, are likely to suffer further losses in the coming months as Europe's debt woes move back into the headlines and China's economy struggles to maintain momentum.
Market watchers warn the benchmark Toronto Stock Exchange S&P/TSX composite index could easily revisit its 2011 low, giving credence to the old market adage "sell in May and go away".
"The lows of last year are a reasonable barometer of where we might go," said George Vasic, chief economist and strategist at UBS Securities Canada Inc. "We had a pretty solid fear factor last year."
Last week the Toronto Stock Exchange's S&P composite index hit a 2012 low of 11,555.08 as it fell for six straight sessions. It was the index's worst skid since falling for seven consecutive trading days in May and June of last year.
The first leg of the weakness was triggered by the second soft U.S. jobs report in as many months. But selling picked up after European elections in which France turned sharply to the left and Greeks gave more support to anti-austerity parties, threatening a painfully constructed bailout package.
The losses echoed a year-earlier drop that ultimately sent the TSX index to a 2011 low of 10,848.19 in October. That move was also triggered by Greek and other euro zone debt problems.
Markets only recovered after the European Central Bank flooded the region's shaky banking sector with cheap short-term loans. Encouraging U.S. economic data and a U.S. Federal Reserve pledge to keep interest rates near zero until 2014 later helped push the TSX to a 2012 high of 12,788.63 in February.
Toronto's main stock index, which closed at 11,694.67 on Friday, i s now down more than 8 percent from that high, m aking the Canadian market one of the world's worst performers this year. An alysts warn it could correct a full 10-15 percent.
"Somewhere in the low 11,500s should be the technical bottom," said Barry Schwartz, a portfolio manager at Baskin Financial Services. "If it gets lower, then we're heading into a bear market."
The push lower could come from China. Analysts warn poor trade numbers and a weak reading of industrial growth have made it more likely that the world's top commodities consumer is headed for a hard landing.
"As we see the Chinese economy slow from 11 percent over the past decade down below 8 percent, we're seeing the negative impact on commodity prices and thus on the Canadian market," said Craig Fehr, Canadian market strategist at Edward Jones in St. Louis.
The sectors of the TSX most sensitive to growth, resource shares, are seen as the most likely to lead market declines. Energy and mining stocks are already 2012's worst performers.
A drop in U.S. crude oil prices to around $96 a barrel from its yearly high of more than $110 in March has sent the TSX's energy sector plunging ne arly 9 pe rcent. Energy stocks suffering double-digit declines include Talisman Energy Inc and Canadian Natural Resources.
"The biggest risk on the resource side is the oil price," said Paul Hand, managing director at RBC Capital Markets.
Materials stocks, which include miners, have done even worse, shedding more than 1 4 p ercent since March. Gold-mining shares have helped lead the decline, with even such major names as Barrick Gold and Goldcorp Inc off sharply.
"If you look at metals and gold stocks, they've all been crushed," Hand said.
RECOVERY SEEN WITHIN YEAR
While short-term prospects are ugly, analysts said the losses could be short-lived, with many expecting the market to recover after the uncertainty of the U.S. elections ends in November.
"From these levels, you can see 10, 15, 20 percent tacked on really easily if you have any type of resolution on the political side in the U.S.," said Arthur Salzer, chief executive officer at Northland Wealth Management.
In Reuters poll of 32 market watchers conducted at the end of March, the median forecast predicted the TSX would climb to 13,275 by year's end. While many have since pared back their targets, there are still expectations of a recovery.
"We're certainly constructive on the global growth story over time, and Canada is uniquely and very favorably positioned for that trend," said Fehr. "It's also the exact same trend that is pushing the Canadian markets lower now."
Still, veteran market watchers warned investors shouldn't be too smug, with the volatility of recent years showing Canada's cyclicals-heavy stock market can fall steeply in a crisis.
"Saying something is cheap is by no means any assurance that it won't go down further," Vasic said.
Michael Pento: President of Pento Portfolio Strategies – Michael is a well-established specialist in the “Austrian School” of economics. A regular on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications. Prior to starting Pento Portfolio Strategies and joining Agora Financial, Mr. Pento served as a senior economist and VP of the managed products division of another well known financial firm. Michael has also created ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.