Corporate Canada Doing Well, Canadian Stocks Not So Much
Globally, major stock market indices are doing well; however, the same cannot be said for the Canadian stock market. The big question is, after a strong earnings season, will Canadian stocks rebound?
A year ago, the Dow Jones Industrial Average passed the 20,000 plateau for the first time ever. Today, even after the stomach-turning volatility in the first half of February, the Dow Jones Industrial Average is up a robust 22.5% year-over-year.
The S&P 500 is also performing well. Despite the sell-off in February, the S&P 500 has advanced 16.3% over the last 12 months. Since the start of January, the S&P 500 is up a respectable 2.7%.
Meanwhile in Canada, even though fourth quarter corporate earnings have been solid, with total profits posted by the country’s largest public companies on track for a close to 20% increase over last year, Canadian equities have failed to impress, and investors have not benefited from the unexpectedly strong results.
Over the last 12-months, the TSX has increased less than one percent. Since the start of 2018, the S&P 500 has actually lost 3.3% of its value. Had you invested at the top of the markets in June 2008, before the Great Recession hammered Canadian stocks, and held on over the last 10 years, you’d only be celebrating a 3.3% gain on the TSX.
So why are Canadian stocks performing so poorly? There are a number of things going on.
First, the TSX is heavily weighed to energy, at around 18.5%. More broadly, energy, mining, and financials account for more than two-thirds of the TSX’s value. That means volatility in the oil and gas and mining sectors are going to weigh down the broader markets and your investment portfolio.
Second, the Canadian economy is doing well, and the country is diversified, but the Canadian stock market isn’t. As a result, the bear market in energy stocks is again, presenting major headwinds. The current market conditions in Canada also highlights why it’s important to review your portfolio and rejig it to ensure you’re getting enough diversification.
Thirdly, the TSX didn’t really benefit from the so-called Trump Bump. U.S. stocks began to rise quickly after Donald Trump ascended to the Oval Office. Investors in the U.S. presumed that Trump’s proposed tax cuts, deregulation, and trillion-dollar infrastructure plan would be good for corporate stocks. The markets responded favourably, sending the Dow Jones, Nasdaq, and S&P 500 to record levels. The benefits of the Trump Bump didn’t have any real lasting effect on the TSX.
Fourthly, international investors do not see much of an opportunity for growth in Canada, as a result, there isn’t a lot of interest in the TSX right now. Should familiar pressures weighing down Canadian equities (uncertainty around NAFTA, housing risks, energy crunch) ease off though, that could change very quickly. That built up tension could release, and investors should relish the delayed rewards of solid fourth quarter earnings.
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