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(Jupiterimages/(C) 2006 Glen Cullis)
(Jupiterimages/(C) 2006 Glen Cullis)

Can TSX close the gap with U.S. stocks? Add to ...

Canadian stocks have been lagging U.S. stocks recently, which has some people wondering if the commodity-charged S&P/TSX composite index is headed for a lengthy slump. Not so, according to Marco Lettieri, an economist at National Bank Financial.

The S&P 500 and the S&P/TSX composite index have been moving along diverging paths over the past few months: Since the start of 2012, the S&P 500 has risen 8.3 per cent, while the TSX has fallen 1.7 per cent. Mr. Lettieri noted that the relative performance difference – that is, the difference between the six-month total return for the two indexes – peaked in March at more than 20 per cent, which is the biggest spread since 1998.

That hurts investors who have a greater exposure to Canadian stocks, as most Canadian investors likely do. But the good news is that divergence leads to convergence. “Over the last 15 years we have observed a handful of episodes where the U.S. market has recorded a significantly stronger 6-month performance relative to the Canadian index and in all episodes the spread narrowed significantly after peaking,” Mr. Lettieri said in a note. Indeed, right now, the spread has narrowed to 12.5 per cent from the March high.

In other words, expect the S&P 500 and the S&P/TSX composite index to produce similar returns over the next several months, or for the TSX to make some headway against the U.S. benchmark index.

“History suggests that the current trend in performance between U.S. and Canadian indices is unlikely to continue and may warrant a review of equity allocations in a North American equity portfolio,” he said.

If he's right, it is hard to imagine the S&P/TSX composite index making much headway without the help of commodity producers, which comprise about half of the index in terms of their weighting. In recent months, these stocks have been among the biggest drags on the index, with commodity prices themselves -- as represented by the Reuters/Jefferies CRB index -- down nearly 21 per cent over the past 12 months.

In 2012, Canadian energy stocks have fallen 5.1 per cent and materials stocks have fallen 13.4 per cent.

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