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The Ottawa headquarters of Canadian e-commerce company Shopify is pictured on May 29, 2019.

The Canadian Press

This relentless rally in Canadian stocks has been brought to you by natural resources.

Unlike the U.S. stock rally, which is being sustained by a handful of tech and consumer behemoths monopolizing the pandemic economy, the Canadian bull market is in the thrall of a commodity boom.

Metals, energy and lumber markets have stormed back from their winter lows, gaining strength off of China’s economic resurgence, a broad improvement in global industrial indicators, and optimism that the spread of COVID-19 can be curbed.

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As a result, Canada’s materials industries have propped up the S&P/TSX Composite Index, even as the heavily weighted domestic banking sector remains deep in correction territory.

Since stock markets globally bottomed out in late March, after losing more than 30 per cent on average in the initial pandemic sell-off, the TSX has largely kept pace with U.S. stocks – the S&P 500 is up by 50 per cent, while the S&P/TSX Composite Index is up by 47 per cent.

In fact, a wide range of assets and markets around the world are trading in an unusually close pattern these days, something that tends to happen when investors are fixated on a single, overriding force, said Todd Mattina, chief economist at Mackenzie Investments.

“The macro story around the pandemic and the recovery of the global business cycle is just such a dominant theme across countries,” Mr. Mattina said.

But beneath the surface of their respective benchmark indexes, the composition of the U.S. stock market streak looks much different from Canada’s.

The S&P 500 index owes much of its performance to its five largest companies – Apple Inc., Microsoft Corp., Amazon.com Inc., Google-parent Alphabet Inc. and Facebook Inc., which collectively returned roughly 58 per cent over the year up to the end of July. The entire rest of the market posted a return of just 1 per cent over the same time frame, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities.

There is nothing like that kind of technology and consumer might at the top of the Canadian market, with the exception of Shopify Inc.

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And Shopify has certainly been pulling more than its weight. With merchants around the world flocking to Shopify’s e-commerce platform, the company’s stock has risen by more than 170 per cent so far this year to become Canada’s largest publicly listed company with a $170-billion market cap.

Without Shopify, the S&P/TSX Composite Index would be down 7 per cent this year instead of 3 per cent.

But resource stocks have been even more important to the Canadian index as commodity prices lent strength to our resource-concentrated market.

“The comeback in commodity prices over the past three months has been nothing short of shocking given the still depressed level of global economic activity,” Benjamin Reitzes, a Canadian rates and macro strategist at Bank of Montreal, wrote in a note.

West Texas Intermediate has more than tripled from its April low (ignoring the brief dip of the global oil market into negative prices), while metals prices have leapt higher, led by gold’s ascent into record territory.

The recovery of the global industrial economy took a leap forward in July, with manufacturing indicators in the U.S., Europe and Canada returning to expansion territory. More industrial activity, of course, means more demand for commodities, especially after factoring in China’s booming second-quarter economic rebound.

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Canadian resource stocks have largely tracked the upward trajectory in commodity prices. The energy sector within the Composite is up by 54 per cent since late March, although it still faces considerable pressures both local and global – from pipelines to climate change – and is far from returning to its prepandemic high.

There are no caveats required for the run in Canadian gold stocks, however. With bullion futures trading well north of US$2,000 an ounce, the Canadian gold mining sector has collectively more than doubled in share price over roughly the past four months.

Of the top 30 performing stocks in the Canadian benchmark index so far this year, 20 of them are gold and silver miners. Over that time, precious metals companies have added roughly 800 points to the S&P/TSX Composite Index.

In addition to the gradual healing of the global economy, the ultraexpansive policies of the U.S. Federal Reserve has also proved bullish for resource prices. Fed stimulus typically weakens the U.S. dollar, which, in turn, tends to translate to stronger commodities markets.

With no reversal of Fed accommodation in sight, Canadian resource stocks should be well positioned, so long as the global economy doesn’t suffer any major relapse.

“If the U.S. dollar keeps weakening alongside forceful blasts of quantitative easing from the major central banks, materials stocks should continue to benefit,” Talley Léger, senior investment strategist for Invesco, said in a recent note to clients.

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“Standing in the way of size buyers like the Fed has been an unprofitable strategy in the past.”

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