You can certainly call it a comeback.
After spending most of the year sitting out a near-universal stock market extravaganza, Canadian equities have stormed back with a decent year's worth of index gains packed into the past two months.
The S&P/TSX composite index recently reached record territory for the first time since last February, largely the result of bank and energy sector gains. Keeping the drive alive, meanwhile, likely depends on beaten-down materials stocks conforming to the uptrend.
"The materials sector remains a sleeping giant within the TSX as it continues to broadly underperform the strengthening commodity price environment," Brian Belski, chief investment strategist at BMO Nesbitt Burns, said in a recent note to clients.
Unless mining stocks start to price in some of the recent gains in metals benchmarks, the Canadian equity malaise could quickly return.
The latest reversal in Canadian stocks, which pushed the index to a 7-per-cent gain over two months, was, as ever, a story of three sectors – financials, energy and materials, which together account for two-thirds of the index's value.
All year, financials have formed the index's base, rarely wavering in its support. The oil and gas sector represented the swing vote, tilting the index back to the upside starting in early September. And materials have spent the year spoiling the ballot, so to speak.
Of the index's 10 worst laggards this year, which takes into account both share price movement and relative market capitalization, nine are mining stocks.
That has occurred despite a strong backdrop for base metals and precious metals alike. Copper prices have risen by 23 per cent since the end of 2016, in large part as a result of an improvement in Chinese import growth.
Gold futures, meanwhile, have risen by 10 per cent so far this year. Canadian producers have been hurt by the surge in the value of the loonie against the U.S. dollar, but even in Canadian dollar terms, gold is up by 5 per cent.
The metals and mining industry, on the other hand, has posted equity gains within the index of just 2.4 per cent this year.
"As such, we believe the materials sector is set to outperform over the near term as stocks catch up to the improved global outlook," Mr. Belski said.
Up until a couple of months ago, the energy sector was in a similar pattern, with stocks diverging from energy prices.
As U.S. crude oil rose from about $42.50 (U.S.) in early June to higher than the $56 mark for the first time in 2 1/2 years, Canadian oil and gas stocks failed to keep pace. The sector was barely higher than 18-month lows up to early September.
But lately, energy stocks have narrowed that gap, even as the supply side of the global market for crude oil remains very much in flux.
The oil and gas sector within the S&P/TSX composite index has risen by 10 per cent over the past two months, matching the gain posted by Canadian financials. Canada's energy giants have provided much of the fuel for the domestic equity rally, with Suncor Energy Inc., Canadian Natural Resources Ltd. and Cenovus Energy Inc. all ranking among the top 10 index movers over that time.
The other big movers rounding out the top 10 include each of the Big Five banks, as well as two other financials stocks – Manulife Financial Corp. and Brookfield Asset Management Inc.
But without the mining sector pitching in, the banks can likely only sustain the index for so long.
"If investors are unwilling to embrace deep cyclicals, i.e. energy and materials, despite global growth synchronization and steadily rising commodity prices, the S&P/TSX may hit an air pocket sooner rather than later," Martin Roberge, Canaccord Genuity's head of North American portfolio strategy, said in a recent report.
The long run in Canadian banks has pushed up valuations to the extent that foreign financials stocks are now priced much more attractively, said Stephen Lingard, senior vice-president at Franklin Templeton Multi-Asset Solutions.
"If you're bullish on global growth and interest rates going up, I think you get more of a [re-evaluation of] financials in other markets," Mr. Lingard said. "Frankly, we can buy financials in Europe, the U.S., Japan and most emerging markets at half the price-to-book value."
Plus, the domestic economic forces that have driven bank earnings for years may soon be tested, said Craig Fehr, an investment strategist at Edward Jones.
"You combine high debt levels with very modest wage gains, it reduces the capacity for consumers to increase spending."