The S&P 500 is on another tear on Friday, while Canada's S&P/TSX composite index is just sort of sitting there. That has actually been the trend for some time – and it is hard to see much change as long as commodities drift. Don't get your hopes up.
Since the end of November, 2011, Canada's benchmark index has gained just 1.7 per cent, without factoring in dividends. The S&P 500, though, has surged more than 31 per cent.
That's a remarkable divergence. And while there are a lot of moving parts to each index, it isn't hard to find the culprits. In Canada, materials have crumpled, falling nearly 37 per cent during this period. In the U.S., financials have surged 55 per cent.
In other words, the biggest drag on U.S. performance during the devastating bear market of 2008 has become the biggest booster during the turnaround. And one of the biggest drivers of Canadian performance when times were good has become the biggest drag.
Specifically, gold has a lot to answer for here. It has slumped 37 per cent from its high in 2011 – including Friday's slide to $1,382 (U.S.) an ounce, down $32 – coinciding with the TSX's underperformance. Gold stocks, as represented by the S&P/TSX global gold sector index, have fallen 56 per cent, essentially over-describing gold's descent.
The upside here is that Canada's fizzle makes it look considerably more attractive – at least for contrarian investors – than many other global indexes. But it has its risks.
One such risk is that energy stocks could take over as chief laggards. To be sure, they haven't exactly been lighting up the benchmark index in recent years. The sector has fallen 23 per cent from its recent high in 2011; it is down 37 per cent from its record highs in 2008.
But strategists at Pavilion Global Markets argue that crude oil is going to struggle to maintain its current price, due to lower demand and higher supply. In April, global demand fell to 89.1 million barrels a day, while supply rose to 92 million barrels a day.
China, the world's second largest consumer of oil, is one reason for the rising spread between demand and supply: "In the past, this country provided the marginal growth in demand that was needed to push oil prices higher," the Pavilion strategists said in a note. "However, since 2012, Chinese demand has moved sideways."
While OPEC oil producers have reduced their output, non-OPEC producers have raised their production – lowering OPEC's share of global oil production to 36 per cent.
"The last time, the OPEC weight was so low was in 2010," the strategists said. "The price of WTI [West Texas Intermediate crude oil] at the time was in the mid-$70s. Prior to that, OPEC's share of global production was lower in the early 2000s. During that period, WTI prices ranged from $20/bbl to $35/bbl."
Right now, crude oil trades at more than $95 a barrel.
David Berman