Is a year-end bounce realistic for struggling Canadian stocks?

A stock market sell-off focused on the U.S. tech sector flared up again Monday, dimming the odds of a winter rally that would pull the Canadian market into the black for 2018.

Concerns about softening demand for iPhones started a familiar ripple effect, as the selling pressure spread from Apple Inc. to its fellow technology and internet giants – and global stock markets collectively, including Canada’s.

Already struggling with internal problems, primarily the crash in Canadian crude oil prices, the S&P/TSX Composite Index also succumbed to U.S.-led volatility, as a loss of 0.6 per cent brought the year-to-date slide to 7 per cent.

Heading into what is historically the strongest period of the year, Canadian stocks are more than a long way from ending 2018 in positive territory.

“I don’t think Canada necessarily rallies enough to claw back all of the losses,” said Brian Madden, a portfolio manager at Goodreid Investment Counsel. “But I also don’t think it would take too much to shift the pendulum in favour of Canada.”

Several signs suggest global investors are unusually negative on Canada right now, Mr. Madden said. “The consensus overwhelmingly is that Canada is not a good place to invest.”

Investor preferences have shifted to U.S. stocks in general and technology specifically, relegating Canada’s resource-laden market to a decade of underperformance.

The price-to-earnings ratio – the most common measure of equity valuation – on the Canadian market currently sits at about 12.8, based on next year’s profit forecasts. Historically, domestic stocks have been that cheap only about 5 per cent of the time, according to David Rosenberg, chief economist at Gluskin Sheff + Associates.

Resource stocks have led the way down for the Canadian market this year, as the limitations of the country’s pipeline network dragged the price of oil patch crude down to a record low of just $13.46 a barrel as of last week.

“The news may be bad, but the Canadian equity market seems to be priced for something worse than just ‘bad,’ ” Mr. Rosenberg wrote in a recent note.

Despite the energy sector’s pipeline predicament, corporate profitability in Canada is generally strong – and rising, said Brian Belski, chief investment strategist at BMO Nesbitt Burns. So a steep discount versus U.S. stocks – which have a forward price-to-earnings multiple of 15.1 – makes for a compelling entry point, he said.

“We continue to believe Canada is rich with solid companies that investors should consider as long-term core holdings,” Mr. Belski said.

A resurgence over the year’s final weeks would be a good start for Canadian stocks, Mr. Madden said. And December has traditionally been a month of bountiful returns.

Over the past 30 years, December has seen gains in Canadian equities 25 times, with an average return of 1.4 per cent. A similar pattern emerges from U.S. market data.

There are some common explanations for this seasonal rally, including the investment of Wall Street and Bay Street bonuses, the tapering off of tax-loss selling by investors to reduce their tax bills and the generally positive sentiment going into a strong period for consumer spending.

It would be a tall order for the S&P/TSX Composite Index to advance by the 7 per cent required to get back to even on the year, Mr. Madden said. The conditions do seem favourable, however, for some paring of losses in the past six weeks of trading, he added.

But even modest gains at home depend in large part on external forces. It would be difficult for Canadian stocks to rally at all if the U.S. market cannot shake the concerns surrounding technology stock valuations, in addition to worries about global growth and rising rates.

Two events in the coming weeks could provide important cues for markets. A meeting between U.S. President Donald Trump and Chinese President Xi Jinping at the Group of 20 Summit in Argentina, beginning Nov. 30, could shed some light on trade tensions between the world’s two largest economies. Additionally, the U.S. Federal Reserve is expected to issue a statement on Dec. 19, which could provide new indications about the course of U.S. monetary policy.