The S&P/TSX Composite Index closed at a record high on Thursday, completing a comeback that began last December in the aftermath of a global stock market correction.
Recent gains in Canadian equities have been led by oil and gas stocks, as well as other sectors closely linked to the broader economy, including industrials, consumer discretionary, and financials.
Canada’s main large-cap benchmark ended the day at 16,612.81 on Thursday, breaking through the previous high of 16,567.42 set last July, before concerns over global growth triggered a sell-off in the second half of the year.
“We're right back to where we were,” said Ryan Bushell, president and portfolio manager of Toronto-based Newhaven Asset Management. “The big difference is the change in interest rates, and I think that's what's given legs to this rally.”
Until the world’s central banks see cause to resume hiking interest rates, monetary policy should remain supportive of stock prices, Mr. Bushell said.
Low interest rates have proven a key driver of the bull market over the last decade, as miserly bond yields have left income investors with little choice but to load up on stocks.
Last year, however, interest rates in Canada and the U.S. broke out of the range to which equity investors had grown accustomed.
Strength in the broader economy put central bankers in tightening mode, as both the U.S. Federal Reserve and the Bank of Canada raised their key policy rates five times between mid-2017 and late-2018.
Fears that excessive tightening could pose an economic threat, combined with signs of slowing global growth, gripped global markets in a sell-off that gained momentum toward the end of December.
So in early January, when Fed chair Jerome Powell promised to be “patient” with additional rate hikes, that went a long way to restoring confidence in the stock market, said Jason Mann, chief investment officer of Toronto-based Edgehill Partners.
“That was the big driver of this move higher, was the Fed doing a complete 180,” Mr. Mann said. Bank of Canada Governor Stephen Poloz also backed off the domestic rate-hike path, pledging to be “data dependent.”
The central bank about-face seemed to fuel a rebound that, like the downslide that preceded it, has been a worldwide phenomenon.
Since bottoming out on Christmas Eve, the S&P/TSX Composite Index has risen by 21 per cent, which is good for only a middling ranking among the world’s developed markets. The Dow Jones Industrial Average, meanwhile, is up by 22 per cent over the same time.
Aside from interest rates, improving economic sentiment has also been a factor in the near-uninterrupted global equity rally so far this year.
Cyclical sectors, which tend to be more attuned to economic cycles, have been among the leaders in both U.S. and Canadian equities over the last couple of weeks.
And yet, sentiment readings are somewhat out of sync with actual economic indicators, which continue to suggest the global economy is slowing.
“The market is making the assumption that stimulus plus a dovish Fed will accelerate growth,” Mr. Mann said. “We need to see that start to come into the economic numbers pretty soon.”
In the meantime, earnings season could prove to be both a catalyst for stocks and a barometer of the economic conditions companies are facing.
It’s still early days in the first-quarter reporting period, but the estimates for Canadian and U.S. profits have already been dramatically reduced.
With about 15 per cent of the companies in the S&P 500 index having released financial statements, earnings are projected to decline by 1.7 per cent over the same quarter last year, according to Refinitiv. While Canadian profit growth is expected to remain positive at 2.5 per cent, that’s down significantly from a 7.6-per-cent estimate at the start of the year.
“This has been a poor GDP quarter generally, so I think a lot of Q1 results are likely to be on the disappointing side,” Mr. Bushell said.
Thursday’s markets
It was the fourth straight week of gains for the TSX. Eight of the index’s 11 major sectors were higher, led by a 1.7-per-cent gain in consumer discretionary stocks and a 1.3-per-cent increase in health care stocks.
One of the largest percentage gainer on the TSX was Canopy Growth Corp., which jumped 4.4 per cent after the company said it would buy U.S.-based pot firm Acreage Holdings in a deal valued at $3.4-billion.
Leading the index were Ero Copper Corp., up 10.5 per cent and Martinrea International Inc., higher by 3.7 per cent.
Lagging shares were Hudbay Minerals Inc, down 4.0 per cent, Kinross Gold Corp, down 3.3 per cent, and Fortuna Silver Mines Inc, lower by 3.3 per cent.
Industrials led the S&P 500 and the Dow moderately higher on Thursday in the wake of robust U.S. economic data and a string of healthy corporate earnings reports.
The Dow Jones Industrial Average rose 110.21 points, or 0.42 per cent, to 26,559.75, the S&P 500 gained 4.64 points, or 0.16 per cent, to 2,905.09 and the Nasdaq Composite added 1.98 points, or 0.02 per cent, to 7,998.06.
The MSCI All-Country World Index fell 0.1 per cent but came off session lows to tick just above last Friday’s closing level.
Lackluster French and German surveys of purchasing managers in the manufacturing sector for April, which showed activity continuing to contract, prompted selling among some investors.
Activity in Germany’s services sector rose to a seven-month high in April, but investors focused on the 44.5 reading for the manufacturing sector, well below the 50.0 mark separating growth from contraction even if it was above the 44.1 reading last month.
The weak surveys out of Europe added to a reading of Japanese manufacturing activity which showed new export orders fell at the fastest pace in almost three years.
“The flash PMIs that came out were very weak,” said John Vail, chief global strategist at Nikko Asset Management. “But retail sales were strong, so that helped (U.S. stocks), and earnings were strong.”
The release of Special Counsel Robert Mueller’s report on Russia’s role in the 2016 U.S. election had little impact on Wall Street.
“It’s probably the news story of the day, but there’s probably no epiphanies or surprises that the market hadn’t anticipated,” said Darrell Cronk, chief investment officer for wealth and investment management at Wells Fargo in New York.
The underwhelming French and German manufacturing survey data hit European stocks in early trade, but short-covering helped the pan-European STOXX 600 index end 0.2 per cent higher.
The data, however, pushed down yields on German Bund and U.S. Treasury yields.
Benchmark 10-year Treasury notes last rose 9/32 in price to yield 2.5596 per cent, from 2.592 per cent late on Wednesday.
“The retail sales report was great, but (investors) seem to be focused on the fact that the data are struggling out of Europe,” said Mary Anne Hurley, vice president of fixed income trading at D.A. Davidson in Seattle, referring to activity in U.S. Treasuries.
The euro also fell to its lowest in more than a week after the European manufacturing data, and was last down 0.6 per cent on the day at $1.1229.
Conversely, the dollar index, which measures the greenback against a basket of six major currencies, rose 0.5 per cent on the strength of U.S. retail sales data.
Oil futures edged up on Thursday as a drop in crude exports from OPEC’s de facto leader, Saudi Arabia, and a draw in U.S. drilling rigs and oil inventories supported prices.
Brent crude futures settled at $71.97 a barrel, up 35 cents from their last close and near Wednesday’s five-month high of $72.27. Brent saw a weekly gain of 0.6 per cent, marking the fourth consecutive weekly rise for the international benchmark.
U.S. West Texas Intermediate (WTI) crude futures settled at $64.00 a barrel, up 24.00 cents. U.S. futures gained just under 0.2 per cent for the week, its seventh weekly gain in a row.
Tim Shufelt