The Canada’s stock market has been in a tear lately.
From just before the United States elections in November, the S&P/TSX compound index has surpassed both S&P 500 and EAFE (Europe, Australasia and the Far East), according to BMO Capital Markets, and reached an record this month.
So is this a good omen for the Canadian economy?
BMO’s senior economist Robert Kavcic analyzed the reasons behind the demonstration in a recent note entitled “The TSX Glitter Economic Gold?”
Tariff problems?
Investors do not like uncertainty and agitation thrown by the commercial war of the president of the United States, Donald Trump, has been enormous. However, the first thing to remember is that markets are always looking at at least three to six months before. Kavcic said that the worst case for the rates had the price of months ago and since then the exemptions of Canada under the Mexico-Mexico Agreement of Canada-United and a pass relative to the day of release has indicated that the tariff cortex could be worse than its bite.
The direct blow of tariffs in the country has been narrow, he said. Steel and aluminum producers face strong duties of 50 percent, and some cars have been penalized, but these industries represent only about 1 percent of the TSX index.
Clean them while they are cheap
Before the commercial war broke out, the term gains of the TSX were around 15 times, compared to more than 22 times for the S&P 500, “a wide gap from a historical perspective,” Kavcic said.
Bank of Canada exceeds the crowd
The Central Bank of Canada cut earlier and deeper than most other advanced economies, leaving its policy rate at a much more neutral level than that of the Federal Reserve.
“The 225 BPS of relaxation in the last year could be removing the brakes of the economy (with a delay of six to 12 months) just when it needs help, and the TSX could be reflecting that,” he said.
What is our market
In the last 25 years, the correlation between the performance of TSX and economic growth has been positive, but not as strong as in the United States, where the S&P 500 demonstrates a better lower route, Kavcic said.
This is reduced to composition. The TSX is dominated by finance and energy/materials. While the first one withdraws from economic conditions, the second has less influence on the economy of what it used to do, he said.
The case in question is the gold shares that were five of the 10 main taxpayers to the increase in TSX this year, and represent approximately one third of the year of profit to date.
The great weapons of the economy, industrialists, consumer spending and real estate represent only 12 percent, 7 % and 2 percent of the index, respectively.
“The TSX is not notoriously a perfect reflection of the underlying Canadian economy given its composition,” Kavcic said.
The final result
While the Canadian capital market resilience at this tumultuous time is impressive, Kavcic said that BMO would be cautious when that strength to economic perspectives.
However, “if the market is discarding a manageable result, we will take it.”
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Trust seems to be returning to the real estate market in Canada, since Monday’s data showed that housing sales increased in May since the previous month for the first time in more than six months.
“While a good month of housing sales does not make a trend, there may be signs of cautious optimism for the resale market for those buyers who are still little affected by the current commercial war,” said Kari Norman, economist at Desjardins Group.
“The lower prices combination, more inventory and less economic uncertainty can continue to attract more housing buyers to the market this summer.”
The new lists increased by more than 3 percent, but the number of months of inventory returned for the first time in six months from 5.0 in April to 4.9 in May.
- G7 Summit in Kananaskis, Alta. Continue
- Today’s data: Transactions of International Securities of Canada, Retail Sales from the United States, Industrial Production and Housing Market Index NAHB
- Trump said he still favors tariffs against Canada while negotiators sit in the G7
- The long depression of the bond market: what it means to investors
- Housing sales in Canada increases for the first time in more than six months
The US bond market is in unknown territory. The reduction of more than 58 consecutive months is, with much, the longest stretch in the history recorded during which the market has supported a maximum to lowercase of -17.2 percent, an amazing figure for an asset class traditionally seen as a safe refuge, writes Investing Pro Martin Pelletier.
It is a great reminder for investors that even the most stable assets are not immune to structural changes. The message is clear: old rules can no longer be applied, and adaptation is not optional, it is essential. Keep reading for strategies
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Today’s position was written by Pamela Heaven with additional reports of Financial Post, Canadian Press and Bloomberg.
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