For 10 years,
the Toronto Stock Exchange outperformed the S&P 500. But for the second year, running, the Toronto market is being left behind.
Here’s why (and how Apple, Microsoft and China have starring roles).
For a decade, Canada’s premier stock market, the S&P/TSX Composite Index beat the S&P 500.
But now, for the second year in a row, the S&P, home to some of the largest public companies in the U.S., may leave the TSX in the dust.
Worries over the slowing Chinese economy and, by extension, the global economy, have sent prices for oil and other commodities on a roller-coaster ride. The TSX is at its highest point since last summer, but way below its March 2011peak of 14,252.77 points.
Meanwhile, shares of technology giants Apple, IBM, and Microsoft continue to power a three-year bull run on the S&P that have lifted the index from its devastating low of 735.09 points in February 2009.
“I’m just not into scapegoats, I’m not into side issues.”
JIM FLAHERTY
MINISTER OF FINANCE
The Star asked Elvis Picardo, vicepresident of research at Global Securities in Vancouver, and Colin Cieszynski, market analyst at CMC Markets in Toronto, to explain.
From 2000 to 2010, the TSX consistently outperformed the S&P 500, largely thanks to a tremendous run in commodities prices, Picardo said. But for 2011, the S&P finished the year flat, while the TSX was down 11 per cent.
So far this year, the S&P is up about 8.5 per cent, while the Toronto market is up nearly 4.8 per cent.
“You could say that it’s a regression to the mean. When you have a period of significant outperformance by one index over another, at some point, it reverses course,” Picardo said.
These days, the S&P’S momentum is coming from the technology sector, Picardo said, as well as health care and the pharmaceutical sector, two sectors that don’t have as much of a presence in the Canadian stock market.
The biggest names on the S&P include Apple Inc., Exxon Mobil Corp., Microsoft Corp., IBM Corp., General Electric Corp. and Procter & Gamble.
In Canada, the TSX includes the Royal Bank of Canada, BCE Inc., gold miner Barrick Gold Corp., automotive parts maker Magna International, and Potash Corp.
Though Apple shares declined Monday, the stock is up about 30 per cent since the start of the year, beating its performance for all of 2011. It accounts for more than 4 per cent of the weight of the S&P index. With its stock sitting at nearly $530 (U.S.) per share, the company is now worth more than $500 billion.
On the Canadian side, commodity prices have been hit hard by volatility and uncertainty in the past year, from the rating downgrade on U.S. debt last August to the euro crisis that has simmered for two years, and the long-feared slowdown in the Chinese economy. Lately, oil prices have been on an upswing because of worries about the Middle East.
Picardo believes the S&P will outperform the TSX this year. He says the U.S. index could get to 1,400 points this year as long as there are no major shocks to the global economy.
For the TSX, meanwhile, much depends on the outlook for the Chi- nese economy. Government officials expect growth of 7.5 per cent, slower than last year’s 9.2 per cent. “Every time we expect the Chinese market to slow down, it never seems to happen, but it finally looks like it could be a reality in the near future. That could take a lot of steam out of commodities and that would affect the TSX,” Picardo said. Canada’s big bank stocks have done well in recent years, but this may be another area of concern, as the economy slows and Canadian household debt swells to record proportions, Picardo said. “If Canada slows down significantly, the financials would be among the sectors worst hit by that development. It’s not that we’re bearish on Canada’s financial sector, but we are advocating caution.” Cieszynski expects to see a return of 5 to 10 per cent for the S&P this year, based on previous cycles and averages. “It has moved quite a bit already, which is why we’re now seeing it stall. It has already had a good run this year.” He’s not convinced that the S&P will outperform the TSX. “Over the course of the year, if commodity prices hold up, the TSX does have some room to play catch-up.”