INVESTMENT INSIGHTS FROM OUR EXPERTS

EQUITIES COMMENT: Canadian and U.S. Stock Returns - A Comparison

What does our Equities Comment this quarter and brownies have in common? Read on....

 

When it comes to brownies there are two main kinds: cakey (tall and light) or fudgy (rich and dense). They have basically the same ingredients but in different proportions.

Canadian stock returns have been “fudgy” compared to the U.S. so far this year however, Canada is not alone. When compared to the return for world markets excluding the U.S., Canada’s performance is in line. What accounts for the “cakey” returns of U.S. stocks? The proportion of ingredients in the U.S. is fairly unique compared to Canada and other world markets.

 

The Canadian stock market is generally represented by the TSX Composite Index and the U.S. by the S&P 500 Index. Both indices have the same 11 sectors (the ingredients). This year, those sectors have had similar returns with the main exception being Consumer Discretionary; the rising Amazon and Netflix stocks account for the much higher U.S. gain. Canada’s Health Care sector has done well versus the U.S. due largely to a recovery in Bausch Health (formerly Valeant). Despite high returns for cannabis stocks, their small size has had a limited the effect on the sector return.

 

This brings us now to the proportions (weightings) of the ingredients (sectors). Financials, the largest sector in Canada, has had a return of about zero so far this year, similar to the U.S. While our Technology stocks have had higher returns than the U.S., because the sector is so small, it has had a limited impact on the TSX Composite. This is contrary to the U.S. where gains in Technology have been fuelling theU.S. market in 2018 and in previous years. Will Technology continue to lead the U.S. market with privacy concerns, tariffs (Technology has the highest proportion of export sales of all sectors) and calls for regulation?

 

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