2008 year in review, part 3 of 8.

Exceptional volatility was the overriding theme of market activity in 2008. The first half of the year may have recorded typical activity on Canadian financial markets. But once global stock markets hit the spiral that saw a 50% decline in their value in the first 11 months of 2008, it was clear Canada would not be sheltered from the storm. With all asset classes impacted by the turbulence — particularly commodities — the resource-heavy Toronto Stock Exchange took a hefty hit.

The S&P/TSX composite index opened at 13,907.73 on the first trading day of the year. During the first six months of 2008, it continued to climb, building on the 7.2% growth it achieved in 2007. Average daily trading volume was 230.5 million during the first half of the year. The index hit its peak value of 15,073.13 on June 18, followed by gradual declines through the rest of the summer.

It was not until September that the beginning of the dramatic sell-off began: it saw the index slip under the 13,000-mark, and in the same month, the 12,000-mark. Trading volume hit levels as high as 599.8 million in a single day, as dramatic volatility became the new market norm.

In October, the deterioration accelerated. Within the first week of the month, the index had tumbled past two more milestones, closing below 11,000 on Oct. 2 and below 10,000 on Oct. 7. The benchmark index witnessed intraday swings as wide as 1,600 points.

Before the month ended, the index dived below the 9,000-mark, hitting a closing level of 8,537.34 on Oct. 27.

In November, “the financial market crisis showed limited signs of abating,” according to Dawn Desjardins, assistant chief economist at RBC Economics Research. The composite index continued to fall, hitting its low of the year on Nov. 20, closing at 7,724.76 — slightly more than half the value it reached five months earlier at its peak. Pulled down more than 765 points that day by lower oil prices and bad news from the banking sector, it was the lowest closing level for the index since 2003.

The sharp erosion in value follows five years of gains for the benchmark index, which included double-digit gains in each of the four years prior to 2007.

Stock market activity south of the border was marked by similar volatility and historic losses in the latter half of 2008 as the financial crisis took its toll. But unlike the gains that Canadian equities experienced in the first two quarters, American stocks began their descent as soon as the New Year arrived.

For the Dow Jones industrial average, the first trading day of 2008 was the high point for the year. After gaining 6.4% throughout 2007, the DJIA opened on Jan. 2 at 13,251.82 — a level which it has not seen since.

The blue-chip average stuck to a range mainly between 1,200 and 1,300 for the first half of the year, before slipping below the 1,200-mark in mid-June, where it remained for the rest of the summer.

The slide worsened in September, when the Dow Jones closed as low as 10,365.45. Within the first week of October, the average had dipped below the 10,000-mark. Three days later, on Oct. 9 — the one-year anniversary of the Dow Jones industrial average’s all time high — the index shed another 678.91 points, to close at 8,579.19, down 40% from one year ago.

The year’s low-point to date on the industrial average correlated with that of the TSX on Nov. 20, when the blue-chip index closed at 7,552.29 — its lowest closing point in five and a half years. The low point came on a day when the U.S. Labour Department reported that jobless claims had reached a 16-year high.

The Nasdaq composite index and the S&P 500 followed the pattern of the Dow, each witnessing peaks on the first trading day of the year and succumbing to unprecedented market swings and dramatic erosion in the months that followed.

Like the Dow and the TSX, both the Nasdaq and the S&P hit low points on Nov. 20. The S&P 500 closed at 752.44 — an 11-year low — and the Nasdaq composite finished at 1,316.12.

Commodity chaos

Likely the most pronounced volatility in financial markets in 2008 was the performance of oil futures. Similar to the activity of the energy-heavy Toronto Stock Exchange, crude futures climbed steadily during the first six months of the year, then dropped dramatically in the months that followed.

@page_break@Crude futures on the New York Mercantile Exchange began the year just shy of the US$100-mark. They hit a peak closing price of US$145.29 on July 3, after a rapid ascent that saw the contract jump as much as US$10.75 in a single trading session. By the end of the month, the contract had shed more than US$20, or 14% of its value.

The plunge that followed saw oil futures lose 70% of their value from the July peak, tumbling to levels near US$40 per barrel in December.

These dramatic swings coincided with a boost in trading volume to unprecedented levels. The daily average trading volume of energy futures contracts on the New York Mercantile Exchange jumped to 1.15 million for the year to date, up more than 50% from 754,311 in 2007. The daily average for crude futures, in particular, jumped 12% to a high of 540,104 in 2008, from 482,246 in 2007.

Gold futures were not exempt from the market volatility or volume rush of 2008, and reached a key milestone of their own during the year. After beginning the first trading session of the year with a closing price of US$857 on the Comex division of the New York Mercantile Exchange, gold futures climbed steadily to an all-time peak closing price of US$1,003.20 on March 18. After closing above the US$1,000-mark for just two-days, gold futures shifted back down and hovered between US$800 and US$1,000 in the months that followed.

More pronounced volatility set in during the autumn months, during which the precious metal futures bounced between US$700 and US$900, gaining as much as US$70.10 during one trading session, and shedding upwards of US$40 in others.

After gradually working their way back up in December, gold futures reached US$868.50 in mid-December — just slightly above their starting point for the year.

The dollar’s dip

The performance of the Canadian dollar through 2008 also reflected volatile market movements.

At the beginning of the year, the loonie was at US$1.01, and advanced towards its peak of US$1.03, which it achieved on Feb. 28.

Along with the TSX and the price of oil futures, the dollar began its steep descent towards the end of the summer. After declines throughout August and September, the dollar fell below US90¢ in early October, and slipped slightly below US80¢ by the end of the month. The loonie hit an annual low point on Dec. 5, at a Bank of Canada noon rate of US77.11¢. It began to recover by mid-month, following further cuts in U.S. interest rates, which set off a flight from the U.S. dollar. It closed at US82.88¢ on Dec. 18.

Although the year is wrapping up, there’s little indication that the extensive market turmoil is set to do the same. Even into mid-December, “exceptional volatility remains the name-of-the-game,” according to economists at Scotia Economics.

IE