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It’s a rocky day on the markets as the TSX and the price of oil have dropped significantly.

At one point the TSX was down more than 480 points. It has recovered some of that lost ground but is still down about 345 points.

Marvin Ryder from McMaster’s DeGroote School of Business joins us with more on what this means.

This is a transcript of that interview. Taz Boga’s questions are italicized.

Good afternoon Marvin.

Hello, there, Taz. We saw this morning break thinking the American stock markets would set a new record high of 18,000 points. I watched a program this morning in the United States where everyone was wearing a hat celebrating 18,000. As they were saying that I watched the American market fall.

Two big things happened. First the price of oil. We had analysts who study this all weekend long and this morning announce they think in 2015 oil is going to hit — wait for it — $40 a barrel.

Now why did that affect the Canadian stock market so much? 1/3 of the stocks traded on the Canadian stock market deal in energy. When you do a future look seeing that oil will fall from roughly $60 to $70 to $40. The fortune of those companies needed to be revised downward.

The second came out of China. We were watching the Chinese economy, seeing the most recent growth numbers. They were down again. Now for the year China’s economy has grown 7%. That sounds wonderful. Canada’s economy only grows 2%. If you take the last month or two and analyze it China is only
growing 4.5%.

So much of the world’s economy depends on how China does as an economic powerhouse. Although the United States seems to get its house in order, with China going in the wrong direction, it sent a shock wave through.

We saw the energy stocks down, but bank stocks are down 2%. It is less than a week after the Canadian banks indicated they had record profits for the year. This should be a week of celebrating, but then everyone began to panic.

Here’s the final thing: computers. Most of these big stock brokerage firms use computer programs to tell them when to buy and sell stocks. They work brilliantly when the markets moves 50 or 100 points. When it moves 200 or 300 points the computers tend to over-react. We see a massive sell-off, in the afternoon we see the reverse as humans jump in and say whoa, this is an unusual time and begin to reverse those trades.

I’m not saying we will end the day at parity. But it will be mitigated as humans take back control of the trading.

You talk about the TSX and how dependent we are on the oil industry. Assuming the American indices aren’t as dominated by it, maybe you can explain why they didn’t fall as much?

The American stock markets has dropped right now I think it is around 100 to 110 points. It is still moving a little bit. They do have energy stocks. But as the percentage it is a much smaller percentage.

If the price of oil goes up, you see the Canadian market move more than the American market for that same reason, they have a more diversified economy. Canada’s economy is primarily based on energy, metals, mining and some other stocks, like the financial stocks. We’re more exposed to that negative news.

I should finally say lower price of oil is great news for customers. There is a school of thought that says once all of this percolates through, as we get in 2015 the lower energy prices might stimulate consumers. We might see people spending more.

They’re not putting in their gas tank that effect we’re not going to see for a few months. It might be a temporary doldrum. With all of the new cash, we may see it reverse itself in 2015.

We talk about the effects on the TSX, but what about the effect on Canadians? How heavily invested are we in the oil and gas industry?