The Poor Performance of Canadian Stocks Relative to US Markets Explained

• February 26, 2018

The first weeks of February saw wrenching volatility across most major stock markets, and this was observed with great concern amongst the various shareholders. Two conclusions can be drawn; firstly, many stocks are still doing very well in year 2018; secondly, Canada’s stock market has been performing poorly compared to the US market.

During the same time last year, the Dow Jones Industrial Average was sitting pretty above the 20,000 mark for the first time in history. But now, the Dow is 19% well above the previous year, and the same trend can be seen in the S&P 500. This is consistent with what is being experienced in other major world markets, only that the case is not the same in Canada.

Canada’s TSX seems to have taken its own route compared to the other two indexes, and it is estimated to lag behind the two by up to 22%. So what could be the cause for the extraordinary behaviour of Canada’s stocks?

The Trump Effect

The date when the TSX differed sharply from the Dow and S&P, is when President Trump was sworn in as the president of the United States of America. With his promises of tax cuts, infrastructure and deregulation, the market found itself in an upward trend that has never been witnessed before, and Canadian stocks just couldn’t keep up.

The moment Trump became president, the American market knew that he would be spending, and since the big dogs in the American market are tech-related stocks, they reacted very strongly from the moment that the new president was sworn in. Canadian stocks, on the other hand, lagged primarily because they are “resource heavy stocks” that were just not booming.

International investors don’t see much in Canada

The other explanation as to why Canadian stocks are performing dismally compared to the US market, is related to foreign investors’ perception of Canada’s economy at the moment. It is sad to note that most investors are not convinced that there are adequate investment opportunities within the country. Awareness throughout global markets that Canadian households are heavily indebted is problematic, and consequently, the consumption growth, which has always been responsible for the growth of the economy, can no longer be sustained.

One fact that remains clear from the dismal performance of Canada’s stocks compared to the US market, is that it is reflective of the overall state of the country’s economy, and unless measures are taken, it could escalate and limit Canadians’ standards of living.