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The last time the Canadian dollar experienced a protracted period of weakness, the top-performing market sectors were insurance, autos and food retailing. And, even if I did write a post (a tad early, sorry about that) suggesting the bulk of the damage to the loonie was behind us, it's always a good idea for investors to hope for the best while preparing for the worst.

The most recent period of "worst," in terms of the loonie, was the six-year period between 1992 and 1998 when the domestic currency fell 41 per cent versus the U.S. dollar. Pointedly, the U.S. economy was recovering from recession during that time, just as it might be now.

The table below shows the performance of the major Canadian equity industry sectors during the last loonie meltdown.

The S&P/TSX Insurance Index stocks doubled every year during the 1992 to 1998 period, but unfortunately those numbers are mostly useless to us now. For one, Manulife and Sun Life weren't even in the benchmark yet. Also, the process of demutualization and takeovers that drove the outperformance are highly unlikely to reoccur this time.

The S&P/TSX Auto Index was the second best performer, which is much more interesting for investors in the current market. The auto industry has changed a lot in the past 20 years; the Big Three are no longer on the financial hook for U.S. worker health care, for instance.

Regardless, a weaker loonie definitely helps the Canadian auto industry. The Michigan- and Tokyo-based auto giants would be far happier to expand production in Canada if wages were paid in a Canadian dollar that was weak.

The S&P/TSX Capital Goods Index, a cyclical sector often driven by the same factors as autos, was also a strong performer during the weak loonie era.

Bank stocks provided investors with a 29 per cent average annual return for the period. The domestic banks were just beginning a process of rapid improvement in profitability at that point. That trend, as with insurance, is unlikely to occur this time. It might actually reverse, given the trend in domestic household debt.

But the strong performance by bank stocks fits with a previous Inside the Market post noting the strong correlation between U.S. economic improvement and domestic banks.

Investment history lessons like this need to be applied judiciously, but I'm convinced they're useful. The more the loonie slides, the more investors should focus their research on domestic auto sector and capital goods stocks.

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