Cheer up TSX investors, you're doing better than nearly anyone else

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The relative performance of Canadian stocks so far this year stands in contrast to what the past five weeks have felt like for many Canadian investors.

Even as domestic markets have been roiled by convulsions in commodities, currencies and equities at the global level, the S&P/TSX composite index has managed to post the best performance of any developed market so far in 2016.

Having recently bounced back from the extremes of pessimism, Canadian stocks appear further along the correction cycle than most of its developed-market peers.

"We believe that Canada was a leading indicator to what we've seen over the last three or four months in global markets," said Brian Belski, chief investment strategist at BMO Nesbitt Burns. "We believe Canada has already corrected."

If that's true, the composite's early lead against the S&P 500 could give Canadian stocks an edge on U.S. equities for the first time since 2010.

Among the two dozen countries considered by Bloomberg to have developed markets, Canada currently ranks at the top with year-to-date losses of 1.9 per cent. Every country index in the group has declined materially since the end of 2015 as the global sell-off has taken hold. Japan's equity benchmark has fallen by 11.6 per cent; Germany's by 13.6 per cent.

The S&P 500, meanwhile, has declined by 8 per cent, giving the composite an edge of more than six percentage points in a little more than one month.

"It's shaping up like we thought," Mr. Belski said.

BMO's 2016 forecast was one of the few calling for Canadian equities to have the better year this year.

For the past five years straight, the S&P 500 has generated superior returns to the Canadian index, a streak that has never reached six years.

The downturn in commodities dragged Canadian stocks into a bear market as the composite declined by 26.5 per cent in the 16 months up to mid-January.

And while selling pressure was justified by Canadian concentration in resources, global sentiment toward Canada reached unreasonable lows, Mr. Belski said.

"People were positioned for devastation in Canada, and clearly that did not happen."

The greatest fears have not materialized, he said. The Canadian economy has not yet sunk into a sustained recession, and Canadian banks have yet to book any substantial losses as a result of exposure to the energy sector.

As a result, Canadian equities were poised to lurch forward at the first sign of good news, or at least a slowing of the torrent of bad news. And since oil prices bottomed out a little more than two weeks ago, the composite has risen by 10.7 per cent.

"Part of it was short covering, but I think there could be more behind it. I think you're starting to see money flow back into Canada," said Greg Taylor, a fund manager at Aurion Capital Management.

While West Texas intermediate remains depressed at $31 (U.S.) a barrel, eventually the global oversupply will ease as the withdrawal of higher-cost production works its way through the market. Under almost any scenario, the trajectory of oil prices over the next year is "clearly less negative" than it was in 2015, Mr. Belski said.

Negative interest rates in Europe could push some foreign money back into Canada, Mr. Taylor said.

And the deal struck last week that would see Quebec-based Rona Inc. acquired by U.S.-based home improvement chain Lowe's Cos. Inc. hints at a potential pickup in mergers and acquisitions by U.S. firms shopping for Canadian corporations on sale, he said.

But perhaps the strongest argument for Canadian stocks is the slope of their descent over the past year and a half. While the Canadian composite has been correcting, the S&P 500 found resilience in the leadership of relatively few stocks, notably the so-called FANG stocks – Facebook, Amazon, Netflix and Google.

"Everyone was hiding in Internet stocks," Mr. Taylor said. "That masked a lot of broader weakness." If that resilience proves to be a delay in the onset of a U.S. correction on an index basis, that could stand Canadian stocks in relatively good stead in the months ahead.