March 3, 2026 | Shocks are Part of life; Sentiment Coming into Them Matters

Macro shocks are a constant throughout time. The market impact is often dramatic in the short-term. Longer-term, outcomes vary depending on the level of optimism that was priced in when the shock hits.

Coming into 2026, most asset markets were exhibiting excessive optimism -pricing the best of all possible outcomes. Just one example: the S&P 500 came into the year trading at 28x its trailing 4Q 2025 earnings — among the top 4 most euphoric episodes since 1900 (shown below, courtesy of B of A). Historically, periods of sharp mean reversion have always followed. Sentiment tends to be contagious.

Other global markets have been less optimistic than US large cap stocks, but in comparison to delirious, less crazy can look relatively better, and still be irrational.

Canada’s TSX index has a very small tech sector and yet, the ‘risk-on’ Canadian stock market leapt with tech-soaked US markets into 2026.  The NASDAQ (below in red since 2024) peaked in October 2025, while the TSX (in black) rose into January. Both are selling off today, and although fossil fuels are up sharply, the energy-heavy TSX is down more than broader US markets.

While the US dollar is up sharply against the basket of global trading partners, it’s weaker versus Canada’s loonie. The thinking is that higher oil prices may keep the Bank of Canada from further policy easing.  It’s a question of how deeply Canada’s economy and stock prices contract. With Canada’s housing market now in its 4th year of mean reversion, the Bank of Canada’s resolve to hold is still to be tested.

Periods of rapid leverage expansion often appear like progress until liquidity tightens. Like recent years, in the mid-2000s, structured credit markets grew rapidly outside traditional banking channels, supported by reckless lending and wilfully blind underwriting assumptions. Stress began in narrow segments before spreading more broadly in 2007–2010.  The NASDAQ (below in red) peaked in October 2007, while the commodity-centric TSX held up to June 2008. Both then collapsed in unison as risk-on markets imploded through March 2009.

In the last tech buble, the NASDAQ peaked in March 2000 and the TSX in August 2000; again both then tanked together into the fall of 2002.

None of us can know what happens next in world events. But that’s always true. What’s different this time is that capital risk has rarely been higher, and after a period of record over-valuation, the masses have a painful payback period due.

Danielle Park March 3rd, 2026

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