TSX still lagging U.S. stocks: What's the deal?

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Canada's benchmark index continues to underperform U.S. stocks, and in such a profound way that observers are starting to wonder if there's something going on here.

The S&P 500 was flat in 2011, but Canada's S&P/TSX composite index slumped 11.1 per cent. And this year, the S&P 500 has risen 11.2 per cent, for one of its best-ever starts to the year, while the TSX has risen a lacklustre 1.3 per cent. This Canadian underperformance marks an interesting shift, given that the TSX had outgunned the S&P 500 for seven straight years, from 2004 through 2010.

Myles Zyblock, chief institutional strategist at RBC Dominion Securities, asks the question that's on everyone's mind: Is this a temporary performance blip for the TSX or the beginning phase of a long-term shift in leadership? His answer comes down to two scenarios, both of which place commodities and commodity producers in the centre.

In the first scenario, the S&P/TSX composite index is suffering from cyclical concerns: The global economy has slowed as a result of Europe's sovereign-debt crisis and interest-rate tightening in Asia. This has weighed on commodity producers, which of course form the backbone of the TSX. The good news about a cyclical slowdown, though, is that the TSX should resume its outperformance after the global economy finds its feet again.

Scenario two doesn't sound as promising. Here, the TSX is being weighed down by secular concerns, which means that the TSX is facing longer-term concerns. For example, high commodity prices of the past decade – which provided the fuel for the TSX's gains – have been met with rising supply. In other words, commodity producers are last decade's winners and the TSX is going to struggle.

So which scenario does Mr. Zyblock subscribe to? Step up, scenario number two!

"In our opinion, both scenarios are playing out to varying degrees at the moment. However, we are inclined to believe that the secular tides are now shifting against Canadian equities," he said in a note. "Assuming this proves accurate, the S&P 500 has entered an early inning of performance leadership."