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The TSX Is Down Again: Why it Could Get Even Worse

The TSX was down big again on Thursday after the market took a breather after six straight days of the index in the red. In trading on Friday morning, it was down ~100 points as well. Many deals are certainly out there, but there are also reasons why investors may want to keep their money in their pocket, at least for now.

There’s no guarantee that just because we’ve seen a drop in price that there will be a rebound. The danger is that this isn’t just a minor dip, but instead it could be the start of something bigger than that.

Why this time might be different

The TSX has not produced great returns over the years; last year it was able to produce a modest 6% return, and that was only after a rally late in the second half of the year, which has since been almost completely wiped out. Even in the past five years, returns have been just 18% and amount to a compounded annual growth rate of just over 3%, which doesn’t leave a whole lot after you account for inflation.

Not only has the TSX seen a lot of swings over the past five years, but the reason this latest sell-off is important is because the Dow Jones has seen big declines as well. The Dow has been less volatile than the TSX over the years, and besides 2011, the last time that the U.S. index had seen drops this big was the Financial Crisis 10 years ago.

What’s weighing on the minds of investors?

The U.S. credit rating hasn’t been downgraded like it was in 2011, nor is there a conflict, oil prices aren’t tanking, and yet the markets are still seeing big sell-offs. Rising interest rates and some high-priced valuations, specifically Bitcoin flying sky high last year, and pot stock seeing tremendous growth in short periods of time, have likely gotten the attention of investors.

The concern is that the markets have been overvalued for some time, and that this dip in the market is just not enough and more could be on the way. A strong economy has been helping the market grow, but there are reasons you should expect a slowdown to happen in Canada.

Are you better off waiting?

In trading early on Friday, there were still no signs of a big bounce back after the latest sell-off, which tells me investors are undecided at best, and while the market may have found some temporary stability, more of a decline could still ensue.

We’ve seen pot stocks like Aurora Cannabis Inc.  (TSX:ACB) and Canopy Growth Corp.  (TSX:WEED) go on wild swings in the past few weeks amid this market instability, and although those are extreme examples, the uncertainty is evident in other sectors as well.

Consider that oil prices reached highs not seen since 2014, and yet investors are still hesitant to invest. Cenovus Energy Inc.  (TSX:CVE)(NYSE:CVE) is back on the decline this past month after mounting a recovery along with oil prices.

The overwhelming sense I get is that there is ample negativity in the markets right now, and while investors may see bargains, it may be better to wait out a further decline.

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Fool contributor David Jagielski has no position in any of the stocks mentioned.

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