Market Update: Canada’s Economic Resurgence Fails to Lift TSX as Wall Street Erases Losses

Canada’s economy blew past expectations in the second quarter, as the nation continued to benefit from robust consumer spending and a synchronized global recovery. However, four straight quarters of above-potential growth has done very little to lift Canadian stocks, which continue to straddle near the breakeven level for the year. Meanwhile, U.S. stocks ended a volatile month on the right foot, with the S&P 500 and Dow Jones eking out minor gains.

Canada’s Economy Outshines Its Peers – Again

The Canadian economy accelerated 4.5% annually in the second quarter, easily tops among the Group of Seven nations and far outpacing forecasts calling for 3.7%. The quarterly expansion was the biggest since 2011. Combined with a stellar first quarter, the April-June expansion gives Canada its best first half in 15 years.[1] By comparison, the U.S. economy expanded 3% annually in the second quarter after upward revisions.

Household spending rose 4.6% from a year ago, a solid follow-up to a 4.8% gain in the first quarter. Consumer spending has been the bedrock of the Canadian economy since the 2008-2009 financial crisis.

Exports also blossomed as the nation’s energy sector delivered a surge in oil production. Goods and services exports rose 9.6% annually, the fastest increase since early 2014, Statistics Canada said.

The Canadian economy is benefiting from a confluence of factors that include rising trade volumes, a bottoming of the oil-price collapse and federal deficit spending. The latest effort will likely motivate the Bank of Canada to continue raising interest rates at a steady pace.

TSX Rises Marginally

Canadian stocks have consistently underperformed their global counterparts this year. For the month of August, they were largely on par with global markets. Canada’s benchmark S&P/TSX Composite Index edged up 0.4% during the month, as overexposure to banks and energy companies continued to undermine the market.

Financials account for 33.5% of the TSX composite, with energy at 20.7% and materials following at 11.9%. Given that none of these sectors are doing well, it’s hard to imagine that the composite index would fare much better. After all, these three sectors alone account for more than two-thirds of the TSX composite.[2] By comparison, they account for roughly a quarter of the U.S. S&P 500 Index.

Trade concerns are also weighing on Canadian stocks following. Canada, Mexico and the U.S. embarked on their first round of NAFTA renegotiations on August 16. The second round of talks was held in Mexico City in early September. More meetings are planned later this year.

Wall Street Extends Winning Streak by the Narrowest of Margins

U.S. stocks overcame multiple selloffs to finish slightly higher in August, with the S&P 500 and Dow Jones Industrial Average recording their fifth straight monthly advance. The Nasdaq Composite Index also recorded its ninth monthly gain in ten.[3]

Political drama at home and overseas contributed to the most volatile trading environment of the year, based on the Chicago Board Options Exchange (CBOE) Volatility Index. The VIX spiked to nine-month highs earlier in the month as geopolitical tensions between the U.S. and North Korea escalated over Pyongyang’s nuclear program.

On the domestic front, racially-inspired riots in Charlottesville, Virginia shined negative spotlight on President Trump after detractors said he didn’t adequately condemn white-nationalist violence. Several high-profile CEOs quit Trump’s business and manufacturing councils to protest his apparent lack of action.

The Month Ahead

Historically, September has been one of the worst months for stocks. According to the Stock Trader’s Almanac, the S&P 500 has averaged a 0.7% decline during September, while the Dow has fallen 1.1%.[4]

[1] Theophilos Argitis (August 31, 2017). ‘Canada’s Economy Surges 4.5% on Consumer Spending.” Bloomberg Markets.

[2] Gordon Pape (June 24, 2017). “Going nowhere – the TSX in 2017: Pape.” The Star.

[3] Fred Imbert (August 31, 2017). “Dow, S&P 500 post 5th straight monthly gains as Street ends August on a high note.” CNBC.

[4] Chris Gallant. “Why do people say that September is the worst month for investing?.” Investopedia.