US and Canada RelationsVergil Kanne
For anyone watching major U.S. indexes hit, or approach, record highs, the relative performance of the Canadian benchmark index looks a touch pathetic.
The S&P/TSX composite index and the S&P 500 really began to diverge two years ago. Since then, Canadian stocks have fallen 9.3 per cent, while U.S. stocks have gained about 14 per cent – for a startling difference of more than 23 percentage points.
The distance from record highs is another notable difference. While the Dow Jones industrial average has been hitting a succession of highs and the S&P 500 is now approaching one of its own, the S&P/TSX composite index is 15 per cent below its high in 2008. It is also 11 per cent below its post-recovery high in 2011.
What explains the performance difference? At the risk of oversimplifying things: Gold and banks – two sectors that once gave Canada's benchmark index a boost over its U.S. counterpart but are now acting as significant drags.
The Canadian materials subindex, which has a big weighting within the composite index, has tumbled 33 per cent over the past two years, even as the S&P 500 has been firing on all cylinders.
More specifically, the 31-member S&P/TSX gold index has fallen 45 per cent from its recent high in October 2011, over-describing the path of gold. Gold hit a high of $1,900 (U.S.) an ounce that month, but has since retreated about 16 per cent.
Now, another sector is on the verge of defining the performance differences between U.S. and Canadian benchmark indexes: Financials.
Within the S&P 500, financials have been at the top of the performance chart for March, with a gain of 4.6 per cent. In Canada, financials have been near the bottom (second only to utilities), with a decline of 1.6 per cent.
Again, it pays to be more specific. In March, U.S. banks, as represented by the KBW bank index, have risen 5.8 per cent, versus a decline of 2 per cent for Canadian banks.
Of course, U.S. banks are recovering from a bear market that has pummelled them – even after recent gains – by more than 50 per cent. That implies that they could see more gains ahead if the housing market recovers and the economy strengthens. In the case of Canadian banks, they hit record highs last month but could now be feeling the effects of a slowing housing market and an uncertain economy.
In other words, the S&P 500 and the S&P/TSX composite index look worlds apart these days – and so it only makes sense that their relative performances reflect these differences.
David Berman