U.S. MARKETS LIKELY TO OUTPERFORM TSX FOR AN EXTENDED PERIOD, STRATEGIST SAYS

If you were hoping this was the year the TSX ends its losing streak against U.S. stocks, one strategist has some bad news for you.

“We believe that an extended period of S&P 500 outperformance against the TSX may have begun,” says Pierre Lapointe, head of global strategy and research at Pavilion Corp.

The TSX has been lagging its American counterparts for the last two years, with the index posting a 7.2% increase last year, compared with the S&P 500’s gain of more than 16%.

It wasn’t always this way. From 2000 to 2010, the TSX had the clear advantage over U.S. stocks as a red hot Chinese economy continued to inflate demand for commodities, buoying the resource-dominated TSX in the process.

While some had hoped renewed commodity demand could help reverse the recent trend, Mr. Lapointe said he does not expect that to happen this year.

“Over the past few years, we have had specific concerns about the perceived strength of the Canadian economy,” he said in a note to Pavilion clients. “For one, we have highlighted that the country’s consumer debt build-up, which propped up housing in Canada’s main cities, is not sustainable. We now feel that Canada is at a critical juncture.”

All the economic tailwinds against Canada come as the U.S. is gaining economic steam. The U.S. housing market continues its ongoing recovery from the crash of 2007, and there is evidence that U.S. consumer and private sector deleveraging is ending, says Mr. Lapointe.

Finally, from a secular point of view, Mr. Lapointe says there aren’t many market catalysts that can boost Canadian stocks this year. In particular, he points out that the composition of the TSX includes banks and precious metal companies that perform poorly in the current economic environment.

Gold stocks are already down 30% since September, and Mr. Lapointe says the future U.S. monetary outlook does not bode well for them.

“Our view on the possible end of U.S. deleveraging leads us to believe that U.S. real rates will slowly begin to grind higher, taking the U.S. dollar higher along with them,” he said. “This is not positive for gold, nor is it positive for Canadian gold miners.”

SCOTT EELLS / BLOOMBERG NEWS Pedestrians pass the New York Stock Exchange. The U.S. housing recovery, combined with fewer Canadian borrowers and a falling gold price, means U.S. markets should con tinue to outperform the TSX, says Pierre Lapointe.