The TSX 300 outperformed the S&P 500 by 0.75% last quarter. This is welcome news for Canadian investors. As most of us know, the TSX has significantly underperformed the S&P 500 over the last five years. The most likely reason for this relative underperformance is the heavier weighting of high-growth tech companies in the S&P 500. Comparatively, the TSX 300 is mostly made up of high-yielding, dividend-paying, lower-growth companies.

 

Last week, the US Federal Reserve lowered its interest rate by 0.5%. This was their first rate reduction in over four years. On the other hand, Canada has now cut its interest rate three times in the same period. As we have said in previous notes, when interest rates are going down, interest-sensitive stocks tend to benefit. Generally, stocks that have yield and stocks that carry higher debt. Many of the companies that make up the TSX share these attributes. One other significant data trend last quarter was expanded market breadth, where we saw many smaller and midcap companies participating in the rally and not just the tech stocks. This trend also bodes well for Canadian stocks, as most Canadian companies are not in the tech sector and are considered small and midcap by US standards.

 

Probably the single biggest reason that the TSX 300 is performing well is that it’s relatively cheap. As you can see from the chart below, the TSX is actually trading below its 20-year average forward price-to-earnings ratio. If we combine the rapidly declining interest rate in Canada with last week's announcement of a stimulus package in China (which will likely push commodity prices higher because of the increase in consumption from the stimulus), you get to a point where the Canadian market finally looks set to run. Let's hope this is the correct assessment.

 

 

 

I have also included a report from our CIBC Economics team entitled “The Fed’s new kink (in the Phillips Curve)".

 

As always, if you have any questions, please feel free to give us a call at any time.

 

Have a great weekend.

 

Milan