Market Update (February 10, 2015)
by Brooke Thackray, Alphamountain Investments
Canada or U.S. stock market? At the risk of sounding flippantā¦ it depends on oil.
Seasonal tendencies favor the TSX Composite, but investors should be ready to fade back to the S&P 500 if the energy trade falters.
The U.S. stock market has been one of the top performing markets in the world, but will this trend persist? Investors have crowded into the U.S. stock market as worldwide growth has slowed while the U.S. economy has shown resilience. Although the U.S. stock market is expected to perform satisfactorily in the future, there could be some reprieve for other stock markets such as the TSX Composite.
Along the way there have been brief periods of non-U.S. markets outperforming. It is possible that we are currently in such a period and investors should be taking note.
Despite possible outperformance of the TSX Composite, investors should not expect an extended period of outsized gains. Any period of outperformance should be considered more of a counter trend. Although investments can be made around the trend, investors should not be married to their positions. Commodities are still in a longer-term secular downtrend and until it is shown otherwise, it is going to be diffi cult for the TSX Composite to consistently outperform the S&P 500.
In the last two months, the TSX Composite has started to show signs of strength relative to the U.S. market. It has been a fortunate mix of energy, precious metals, Canadian banks and a strengthening Canadian dollar which has helped the TSX. The TSX has a history of outperforming the S&P 500 in the month of February. Although it is not an overwhelming track record, it is noteworthy, especially when the major Canadian sectors are performing well. In addition, the current seasonal backdrop is positive for the Canadian market as the Canadian banks, and the energy sector historically perform well at this time of the year.
The energy sector has been a large driver of the TSX Composite. With a volatile oil price and calls for both a much higher and much lower price and given the large component of energy in the TSX Composite, it should be expected that the performance differential between the TSX Composite and the S&P 500 will not be small.
If the TSX Composite continues to outperform, do not expect the trend to last forever as the S&P 500 tends to be favored in the later part of April. The transition back to the S&P 500 at this time of the year is largely dependent on the strength of oil. For the moment, it makes sense to have increased exposure to the TSX Composite, with the anticipation of fading back to the S&P 500 if the TSX Composite starts to underperform.
Read/Download the complete report below:
Thackray Market Letter 2015 February
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