Canadian Index Saved by Energy Stocks

The rally that began early in February on the S&P 500 failed to bring the index back into positive territory, after achieving an approximate 50% retracement of the selloff that occurred in January. Renewed selling in tech stocks pulled the broader S&P 500 back down to July 2021 levels, and selling has continued into the early trading sessions of March. At the end of February, the S&P 500 was down -392.24 points from Dec 31, 2021, or -8.96% year-to-date (YTD). Comparatively, the TSX has faired much better. Buoyed by energy, financial services, and materials the Canadian index closed the month of February only slightly positive, up 0.13% or 28.07 points, and at -0.45% YTD the index is essentially flat in 2022 so far. 

While stocks slumped and oil surged, the Olympics came and went along with Super Bow LVI.  Prime Minister Trudeau invoked the Emergencies Act for the first time in history to crush the trucker protest that invaded Ottawa and Russia launched what Putin called a “special operation” in the Ukraine, which has sparked a massive premium on oil and caused the western world to retaliate with punitive sanctions. Meanwhile, covid has all but disappeared as restrictions have been lifted worldwide and the media has moved on to new headlines for the first time in 2 years.

In addition, a balance of blue-chip companies in Canada and the U.S. is also another barrier of protection; the difference in performance between the two indices YTD is a prime example. The jump in crude is the most visible and most important shift. We estimate that, if sustained, this latest run-up will add about 0.8 percentage points to headline inflation in North America. In the U.S. we are looking for a hefty 0.9% monthly move, which could lift the headline annual rate to a towering 8% pace. We remain of the mind that North American markets will finish the year within our target price range (S&P/TSX 24,000 and S&P 500 5,300) and are beginning to chip away at some bargains present in the market due to the increased volatility. 

Many clients have asked us our thoughts regarding the Russia/Ukraine conflict and what impact it will have on their portfolios. To some extent, we don’t know what the total impact will be, but we can say with certainty that our North American bias has shielded us somewhat.

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