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Commodity-fuelled winning streak for Canadian stocks returns Add to ...

The Canadian and U.S. benchmark indexes don’t always agree on the direction stocks should take and the past five trading days are a clear example of this independence: U.S. stocks are idling while Canadian stocks are zooming.

On Wednesday afternoon, the S&P/TSX composite index was on track to score five straight days of gains, for an overall gain of about 1.9 per cent. But the storm-ravaged S&P 500 has seen its share of ups and downs over this same period, with an overall gain of less than 0.1 per cent.

Five days is a short period of time. And no doubt, the two indexes have disagreed before. In 2011, the S&P 500 was unchanged, after ignoring dividends, while the TSX fell more than 11 per cent. And year-to-date, the S&P 500 is up an impressive 12 per cent, or 8 percentage points ahead of the TSX.

The earlier outperformance of the U.S. index has raised some eyebrows in Canada, where some observers have wondered if the slowing Chinese economy is to blame for struggling commodity producers – which once propelled the commodity-heavy TSX to greater gains than its more diversified U.S. counterpart. Canadian materials and energy stocks are down about 23 per cent each from their recent highs in 2011.

Over the past five trading days, two of which occurred when U.S. markets were closed due to Hurricane Sandy, the TSX has shaken off this underperformance trait. Could it be that investors have been less concerned with the devastation of Hurricane Sandy and its potential impact on the weakened U.S. economy and instead are feeling optimistic about China?

Commodity producers, which arguably have the greatest exposure to the Chinese economy, have certainly been among the strongest performers during this five-day stretch. Materials have risen 4.4 per cent and energy stocks have risen 1.4 per cent.

But the gains have actually been remarkably broad: Financials are up 0.8 per cent, utilities are up 1.4 per cent and telecom stocks are up 3.1 per cent.

This is surprising given the weak Canadian economic numbers troubling investors right now. On Wednesday, they learned that economic growth contracted 0.1 per cent in August, versus expectations for a 0.2 per cent gain. CIBC World Economics believes that growth in the third quarter looks as though it could come in at a mere 1 per cent.

That follows a downgrade to Canadian economic growth forecasts from private sector economists, when they presented their outlook to the Minister of Finance earlier this week. While economists still believe the economy will grow a lacklustre 2.1 per cent in 2012, they cut their growth forecast for 2013 to just 2 per cent – down from a previous forecast of 2.4 per cent.

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