Canadian markets keep Trump-era winning streak going

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The early days of the Donald Trump era have proven gainful for U.S. stocks, to the exclusion of almost every other market. Canada is one of the few exceptions.

The winning streak extended through Monday, as the S&P 500 index, Dow Jones industrial average and the Nasdaq composite index all rose to record closing highs. The Russell 2000 index of U.S. small caps, which tend to do well when the domestic economy is strong, also hit a record. The session marked the first time all four indexes hit closing records since Dec. 31, 1999.

Canadian stocks have kept pace with the U.S. equity rally in the past two weeks. On Monday, the S&P/TSX composite index broke through the 15,000 mark for the first time since June, 2015. Banks, industrials and energy stocks have been the big winners on both sides of the border.

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"The market postelection moves are extreme, with few comparables," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. But outside of the United States and Canada, 42 out of 46 foreign developed and emerging markets in the S&P Global Broad Market Index declined since the election, according to Mr. Silverblatt.

The strength in Canadian and U.S. stocks, while contrary to most forecasts under a Trump upset scenario, may have little to do with Mr. Trump himself.

"The market was foreshadowing this," said David Burrows, president and chief investment strategist at Toronto-based Barometer Capital Management. "This has actually been setting up for three or four months."

A shift into cyclical stocks and away from bond proxies was already under way prior to the culmination of the election campaign. If there has been a Trump effect, it has been to accelerate the market rotation that had its roots in economic trends, not political ones, Mr. Burrows said.

Early in the year, investors were still very much in favour of defensive stocks, which offer some shelter from economic cycles, and those paying dividends, which act as substitutes for bonds in a low-rate era.

Declining bond yields kept existing market trends in place and maintained the global appetite for higher-yield sectors, such as utilities, telecoms, and REITs.

The trend reversed around midyear, making winners of losers, and losers of winners.

At the time, the wisdom behind perpetually low and negative interest rates started to come increasingly into question. And the yields on benchmark bonds, such as the U.S. 10-year Treasury, began to rise.

That change relegated yield-heavy U.S. sectors to the bottom of the leaderboard. From the end of June, up to election day, the S&P 500's worst performers were telecom, real estate and utilities. Same for the TSX, in addition to materials stocks, as commodity prices took a hit.

The leading sectors over that same time, up to the close of trading before Mr. Trump won, were technology stocks, financials and industrials – all generally considered to be cyclical. Again, the same pattern was clear in the Canadian stock market.

And those trends have mostly held up in the aftermath of the election, despite the fact that the market had been expecting a Hillary Clinton victory. In certain ways, Mr. Trump's win has served to amplify existing, emerging patterns, Mr. Burrows said.

On an index basis, U.S. stocks are up by an impressive, but hardly spectacular, 2 per cent to 3 per cent over the past two weeks of trading.

"However, this understates the massive rotation that is occurring between asset classes and groups of stocks," Jonathan Golub, chief U.S. market strategist at Royal Bank of Canada's investment arm, said in a note.

U.S. bank stocks, in particular, have surged in value in anticipation of a less onerous regulatory regime for financial institutions under Mr. Trump, who has promised to scrap the Dodd-Frank Act.

Since Nov. 8, the S&P 500 banks index has risen by nearly 15 per cent, which represents the strongest postelection reaction to a first-term president going back to Herbert Hoover in 1928, according to Quartz.

Canadian financials stocks have largely followed suit, though they've been bested by energy stocks over the past two weeks.