Canada: A Weak Economy and a Strong Stock market?

A boom on the Canadian stock market while economic data signal a recession?  A contradiction? Not really, as shown below. 

The Canadian economy is facing harder times. Only a low GDP growth rate in Q4 of the last year, and there are no signs of improvement in the current year in sight. Temporary cuts in oil production, decreasing expenditures on buildings and consumer goods in an environment of declining house prices and negative expectations. The slow growth in disposable income has led to a record high household debt to disposable income ratio, while the absolute household indebtedness has reached a 27-year high. Conclusion: This is not an environment that usually supports strong economic growth, interest rate hikes or a stock market rally. 

Nevertheless, the TSX achieved an increase of 12% this year. Albeit this is partially attributable to the very low base with strong collapses on the stock exchange in 2018 (in most global equity markets), while the TSX is still only about 3% higher on balance than five years ago the Canadian stocks have outperformed the S&P 500 this year which is quite impressive. 

The explanation, however, is understandable if slightly modifying the famous quote of a former US president “it’s the oil, stupid”. Strong WTI prices have led to a boom in oil stocks and an increase in Canadian oil prices. And utilities, banks and real estate have also posted double-digit gains in the US and Canada this year, and these sectors together account for remarkable 40% of the TSX versus just 20% of the S&P 500. Consider the flip side, when the market is keying in on growth – technology, industrials and consumer discretionary make up 40% of the S&P 500 versus just 20% in the TSX. Overall, however, the positive signals for a good year for the Canadian stock market should prevail.