Canadian Equities continue to underperform even after a massive sell-off south of the border

Friday's sell off in U.S. equities was one of the largest in recent history, with a 2.1% drop - a drop this large not seen since June of 2016.

A correction could be expected after such incredibly strong growth, with the Dow Jones Industrial Average up more than 26% over the last 12 months. Whether or not this is a blip in a continuing bull market is unclear; what is clear is that the Canadian market is lagging.

Over the last 12 months, the TSX Composite Index is almost exactly even (down 0.25% at the time of writing). That is a significant difference from our neighbours south of the border.

The year-to-date figures paint an even more challenging picture. This has been the toughest January for the S&P TSX since 2010. The market is down almost 4% YTD in Canada, whereas the S&P 500 is up more than 3.3% even after Friday's sell-off.

Every major sector in the S&P TSX has underperformed its U.S. counterpart this year. Finding a reason for this uncoupling is difficult to pinpoint, but there are some strong contenders. Composition is one such factor.

Let's start with Energy. The Canadian market has significant Energy weightings, and the differential between WTI Crude prices and Canadian crude is huge. Last week, WTI was trading at about $65 a barrel, while Canadian Crude was trading at about $38. There's no doubt this is weighing on Canadian energy stocks, with transportation to refineries south of the border putting massive pressure on the companies north of the border. This is the largest differential since 2013.

So Energy has been a laggard - what has been working? Technology and Healthcare have been major drivers for the U.S. markets. While those two industries make up 38% of the S&P 500, they comprise only 4.5% of the S&P TSX.

There are certainly other factors. The tax reform in the United States has added fuel to the market fire. In Canada, 3 provinces have raised minimum wage. The loonie has been strong recently, while the Dollar has been weaker (making U.S. exports more attractive to foreign countries). High Canadian household debt levels are a concern, as well as NAFTA uncertainties.

If Canadian markets are going to close the gap, it seems more likely that would be a result of U.S. markets decelerating rather than Canadian markets moving towards a 20% growth rate.

by Rick Sturch

(This article should not be construed as investment advice)


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