A funny thing happened in the Canadian stock market through the latest commodity dip: nothing. Or close to it.
As metals and crude oil prices stumbled through late winter, the S&P/TSX composite index was uncharacteristically composed for a market heavily concentrated in natural resources.
"It used to be you could just look at a commodity index, and you'd easily be able to guess what the stock market did," said David Rosenberg, Gluskin Sheff + Associates' chief economist. "Today it probably has more to do with loan delinquency rates, wealth management and capital markets, and less to do with lumber prices."
As a consequence of the oil crash and the multiyear decline in the price of everything from aluminum to zinc, the resource sectors that have long-steered Canadian equity trends now occupy a somewhat diminished role. In their place have stepped the mighty banks.
Today, the financials sector is, by far, the largest and most dominant subset of the Canadian equity space, with bank stocks trading at, or close to, all-time highs, driven by soaring profits.
Materials and energy stocks, while still powerful forces in Canadian equities, combined don't add up to the sector weight of financials, which account for 35 per cent of the market capitalization of the S&P/TSX composite index.
Canadian equities, as a result, may now be somewhat less susceptible to commodity volatility, Mr. Rosenberg said.
Such seemed to be the case when crude oil benchmarks dove recently over rising U.S. production and elevated inventories. While West Texas intermediate fell by 14 per cent from about $55 (U.S.) a barrel to $47 in February and March, the S&P/TSX dropped by just 2.5 per cent over that time.
Broader commodities indexes have also hit a rough patch over the past couple of months, to which Canadian stocks have also been relatively resilient.
Several caveats are called for. It's a relatively short time-frame being discussed, and there are many possible causes for the recent resistance of equities to commodity weakness.
"Most participants expected a range-bound oil price," CIBC economist Nick Exarhos said. "We got to the lower end of the range, but it's still inside the range."
If oil and metals markets revisited the kind of steep descent that consumed investors a couple of years ago, the TSX's new-found resilience would doubtlessly crumble, Mr. Exarhos said.
Plus, the recent diversification of the stock market has not been matched by any real rotation away from resource industries in the real economy, he said.
So while the big banks have replaced the big oil companies atop Canadian equities, the market and the economy remains collectively heavily exposed to oil.
"If I had access to just one number to get the Canadian outlook right, I'd take the price of oil," said Vincent Delisle, a portfolio strategist at Scotia Capital.
And yet, emerging patterns observed in Canadian equities suggest a shifting of underlying forces, at least at the margins, Mr. Rosenberg said.
The weakening of the bond between commodity prices and the TSX could make domestic stocks less aligned with the global economy. And the strength of the banks could firm up the relationship between Canadian stocks and North American economic fundamentals.
"You measure the pulse of the Canadian economy through the banks. And the correlations are telling you there's more of a domestic economic flavour attached to Canadian stock market performance," Mr. Rosenberg said.
For years, Canadian stock benchmarks have traded in virtual lockstep with emerging market equities.
The rise of the Chinese economy required an endless source of natural resources, which Canada was happy to supply.
Chinese growth enriched Canada's mining and energy sectors, and made the overall Canadian market heavily correlated with emerging market stock benchmarks as well as commodities indexes.
But double-digit annual GDP growth in China finally relented, and commodities started on a long downward slope in 2011. Then an oversupplied oil market went into freefall in 2014.
Canadian equities remained intimately connected to commodity prices through the sell-off.
But in recent months, that relationship has weakened, Mr. Rosenberg said. The correlation between the S&P/TSX composite index and commodities indexes has long stood at about 80 per cent, where 100 per cent is a perfect alignment.
That correlation has recently fallen by about half, Mr. Rosenberg said.
That effectively shifts the focus away from resources and toward financials. "It is how the banks perform that really make or break the Canadian equity space."
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Tim Shufelt