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Canada’s lagging market

Sep 22, 2017
Financial chart

By Richard J. Wylie, CFA, Vice-President, Investment Strategy, Assante Wealth Management

Since North American markets bottomed on March 9, 2009, following the global financial crisis, the S&P 500 Index in the U.S. has gained more than 260% (as of mid-July 2017). Over the same period, the Canadian market has claimed less than half of that advance. Naturally, the path for both markets has been far from a straight line. However, during the period, U.S. market reversals were limited to only three material corrections (a “correction” is widely considered to be a market index decline of between 10% and 19.9%). In comparison, the broader Canadian equity market, represented by the S&P/TSX Composite Index, has had a bumpier ride. Over the same period, it experienced only one correction, but had two full-blown bear markets (a bear market is generally declared once a sustained decline exceeding 20% has been recorded).

Canadian equity markets have been largely range-bound since 2014. After posting a new high of 15,658 on September 3, 2014, the market began an extended period of weakness, culminating in a 24.4% decline by January 20, 2016. A subsequent recovery did not occur until February 10, 2017, and by February 21, another high was recorded. Stateside, additional new highs have continued to be reached in 2017.

While both North American economies have recorded some fluctuations in overall GDP growth, the U.S. has seen more stable employment growth and a commensurate decline in its unemployment rate. Not surprisingly, this has produced a divergence in monetary policy. The U.S. Federal Reserve’s first tightening move took place on December 16, 2015, when it raised the interest rate, while the Bank of Canada’s first interest rate hike was July 12, 2017. This less aggressive stance is considered one of the reasons why the Canadian dollar has underperformed the greenback.

The currency and the domestic equity market index have also been influenced by energy prices. Energy is the second-largest industry sector and comprises just less than 20% of index market capitalization1 in Canada. Even though world oil prices recovered from the lows in February 2016, they too have been largely range-bound since April 2016, explaining another component of the underperformance. Financials represents the largest sector in terms of market capitalization2. The pricing of a number of underlying constituent companies were adversely affected by the controversy surrounding mortgage lender, Home Capital. This spring, the Ontario Securities Commission accused Home Capital of making misleading statements to investors about its mortgage underwriting business. Back in mid-June, the lender and three former executives agreed to pay a total of $12 million to settle these allegations, but the drag on financial stocks was considerable.

The difference in relative performance of the two markets underscores the need for diversification and an understanding of the risks of any market. As well, periods of underperformance can produce undisciplined emotional responses as investors are tempted to chase the outperforming asset class or region. Having a professional advisor can help ensure that an investment portfolio is properly diversified. In addition, having a well-rounded financial plan can help investors to avoid chasing the “hot” market.

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