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A woman holds <strong>U.S.</strong> and Canadian <strong>flags</strong> as she wears a button and a shirt with portraits of <strong>U.S.</strong> President Barack Obama on Parliament Hill in Ottawa, February 19, 2009.Christinne Muschi/Reuters

History shows that the Canadian equity market tends to outperform the U.S. equity market from the third week in January to the first week in March. Prospects for Canadian market outperformance this year are looking strong.

A chart from showing returns by the S&P/TSX composite index relative to the S&P 500 index during the past 20 years indicates that the S&P/TSX on average has outperformed the S&P 500 index by 2.5 per cent from Jan. 21 to March 6.

The main reason for outperformance is the composition of the TSX index relative to the S&P 500 index. The Canadian index is more heavily weighted in financial services, energy and materials – sectors that show strong seasonal performance during the January to March period. Another factor favouring the S&P/TSX is the annual focus by Canadians during this period to contribute to their Registered Retirement Savings Program (RRSP). At least some of their contributions ultimately are invested into equity markets.

What about this year? Registered Retirement Savings contributions will be a factor this year, but less so than previous years. Many Canadian investors are opting to invest first in their Tax Free Saving Accounts (TSFA) before contributing to their RRSP. Other macro factors are expected to have a greater influence this year.

Canadian investors may prefer to invest in Canadian equities instead of U.S. equities this spring due to political instability in the United States. Several key political battles will be fought this spring between the President and Congress including tax reform and the U.S. debt ceiling. News this week that the House of Representatives has passed a conditional bill to suspend enforcement of the U.S. debt limit until May 18th will heighten uncertainty about a possible debt default as the expiry date approaches.

Meanwhile, prospects for stock market gains in Canada's financial services, energy and materials sectors are turning positive. Base metal and energy prices are improving thanks mainly to increased demand from China. Weakness in the Canadian dollar this week following the Bank of Canada's decision to defer an increase in Canada's overnight lending rate will add to the profitability of Canadian corporations in the first quarter. Companies in the natural resource sector will benefit most.

On the charts, both the S&P/TSX composite index and the S&P/TSX 60 index already are showing outperformance relative to the S&P 500 Index. Outperformance started last August. During the past four weeks, a mild acceleration has appeared at a time when favourable seasonal influences kick in.

Investors have lots of exchange traded fund choices when considering an investment in the Canadian equity market. All of the major Canadian ETF providers offer product. The most actively traded ETF in Canada is iShares S&P/TSX 60 Index Fund. The lowest cost ETF in Canada with an MER of only 0.05 per cent is Horizons S&P/TSX 60 Index ETF.