Crude awakenings: Experts say stabilizing oil unlikely to aid TSX

While stabilizing oil prices helped Canadian equities break out of their doldrums in the second half of 2017, investors expecting the Toronto Stock Exchange to catch up with its outperforming global peers in the new year should instead anticipate more modest returns — plus greater market volatility.

“Despite being flat in the early part of the year and then posting some gains here in the back half of the year, the swings in equity prices on the S&P/TSX composite index have been incredibly small by historical standards,” said Craig Fehr, a Canadian markets strategist with Edward Jones.

“And so I think the first thing we can expect from the TSX is much bigger swings in prices, much more volatility on a daily and weekly basis.”

“All that said, I think there’s still more gas left in the tank for this bull market,” he added.

“I think we can see positive returns again in 2018. I would expect them to be relatively muted.”

After hitting a record high of 15,922.67 on Feb. 21, the TSX steadily declined to a low of 14,951.88 by Aug. 21, down 2.2 per cent on the year at the time.

A resurgence in oil — which saw crude prices rally from a 2017 low of $42.53 US per barrel on June 21 to a barrier-breaking high of $60.42 US on the final trading day of the year — sparked a surge in energy shares that saw the TSX complete its first of many record closes in the latter half of 2017.

By Dec. 27 and Dec. 28, the TSX closed at consecutive record highs of 16,203.13 and 16,221.95, respectively. It finished 2017 at 16,209.13, ahead 921.54 points or about six per cent on the year.

By comparison, Wall Street’s S&P 500 index — the American equivalent to the TSX — gained 434.78 points or about 19 per cent in 2017.

The Dow Jones industrial average added 4,956.62 points or about 25 per cent, and the Nasdaq composite index gained 1,520.27 points or about 28 per cent.

One the most dominant themes in equity markets in 2017 was the trend toward stability from cyclicality in an otherwise uncertain political and geopolitical backdrop, said Candice Bangsund, vice-president and portfolio manager at Fiera Capital.

This saw the more defensive U.S. equity markets, which are heavily weighted toward technological growth, thrive last year.

Meanwhile, the cyclically based Canadian equity markets made up primarily of financial, energy and materials sectors were largely underappreciated.

While oil is a key influence on the commodity-heavy TSX, economist Todd Mattina of Mackenzie Investments said he expects it to remain range-bound around its current level of $50 to $60 US a barrel going into the new year — a level that will not really help the index in a meaningful way.

“The TSX has benefited in recent months because of the strong rally in oil prices.

“But there’s a number of uncertainties going into 2018 that also cloud the outlook,” he said.

“One of them is how much further can oil prices rally?”