The economy is on fire. The stock market is flat.

We have the best economy in the G7 and worst stock market. Why?

September 28, 2017

The growth in Canada’s GDP continues to be buoyant – arguably the strongest in 17 years – and yet the Canadian stock market remains flat. Why is the relationship between our domestic economy and our stock market so rocky?

In general, there is no economic principle that says the performance of the stock market should be aligned with the overall condition of the economy. But, as Tim Shufelt, Investment Reporter for The Globe and Mail, observed (September 6, 2017):

‘The relationship between the Canadian stock market and the domestic economy is verging on full estrangement. In the midst of a broad-based, geographically diverse Canadian expansion that could make this calendar year the best in more than a decade, Canadian equity performance ranks as the worst in the industrialized world.’

What’s going on? Resource dependency.

Our energy sector accounts for approximately 20% of the market capitalization of the S&P/TSX composite index.
The energy weighting within the S&P 500 amounts to just 6%, protecting the U.S. market from the oversupply of oil – which intensified again this year.

As reported by James F. Peltz in the Los Angeles Times (June 30, 2017): ‘Stock investors already have enjoyed welcome fireworks this year with an especially big pop in major technology shares. Facebook Inc. has jumped 31% this year, while Apple Inc. and Netflix Inc. are up more than 20%. E-commerce giant Amazon.com Inc., which often is viewed as a tech stock, shot up 29%, and Google parent Alphabet Inc. rose 17%.’

By contrast, year to date in Canada writes Mr. Shufelt: ‘Oil and gas stocks are down 15%, while energy and production companies specifically have dropped 23%.’

The surge in U.S. equity prices has been fueled by the technology sector. It’s as simple as that. Our resource exposure is undermining our stock market performance and we need a rally in the price of crude to turn things around.

Failing that, Canadian stocks will be unlikely to align with our domestic economy over the rest of 2017.

For years, the trope that oil, gas and other natural resources would drive employment and economic growth in Canada has been common. It’s been the position of federal and provincial governments, repeated by newspaper editorialists and think tanks. Certainly, resources have played a big role in the building of Canada but the idea that resources – oil in particular – will have a central role in our economy looks more and more out of touch by the day.

Geoff Funke, Senior Wealth Advisor, Scotia Wealth Management, 604.535.4721.