It’s almost as if the December correction didn’t happen.
The late-year free fall in Canadian stock prices has been overshadowed by a rebound of even greater speed and magnitude.
Since bottoming out on Christmas Eve, the S&P/TSX Composite Index has rallied by 11.1 per cent, lifting the Canadian market out of correction territory.
Fuelled by an easing of global recession concerns, progress on resolving trade disputes, reassurance from central bankers over rate policy and a rebalancing oil market, equities in Canada and around the world have stormed back in what has been the strongest start to a year in recent memory.
The main Canadian stock index has now posted positive returns in 15 of the past 16 sessions dating back to late December.
“It is kind of odd to have a correction and just bounce right back 10 per cent over such a short period of time,” said Christine Poole, chief executive of Toronto-based GlobeInvest Capital Management.
“For the market to hold these gains and continue to go up, you really need to see corporate profits come through.”
Earnings season, well under way in the United States but yet to begin in earnest in Canada, will be an important test of what has been a remarkable revival of risk appetite, Ms. Poole said.
The turning point in global markets roughly coincided with remarks from the U.S. Federal Reserve that its monetary policy would take cues from economic data, quelling fears that overly aggressive interest-rate hikes could spark a recession.
“It certainly has been a very positive market dynamic to see the Fed’s posture change a bit after the volatility following their last hike,” said Ed Perks, chief investment officer of the multiasset solutions group at Franklin Templeton Investments.
As investor confidence returned, crude-oil prices also headed upward, providing a potent double positive for Canadian stocks.
The rebound in Canada has mirrored the sell-off, with the hardest-hit sectors leading the gains. The same pattern is clear in the U.S. market, suggesting the reversal of a correction that overshot to the downside, said Darren Sissons, a portfolio manager with Campbell Lee & Ross Investment Management.
“What we got in December was quite aggressive and very quick. Some countries were seriously oversold,” Mr. Sissons said.
Canada was clearly among them, said Brian Belski, Bank of Montreal’s chief investment strategist, suggesting the dive in Canadian stocks “was fuelled more by speculation, rhetoric, innuendo and fear relative to fundamentals."
However, Canadian stocks are now back to where they were in early December, and some investors are wondering if the market has abruptly overshot to the upside. “Now I think the recovery has gone too far,” Mr. Sissons said.
Earnings season could help render a verdict.
One point of focus will be the Canadian energy sector, which has seen its earnings estimates slashed over the last three months.
For the S&P/TSX Composite Index as a whole, fourth-quarter profit growth is expected to come in at just 3.8 per cent over the prior year, according to data provided by Refinitiv. At the start of October, that estimate sat at 12.9 per cent.
On the upside, the bar that Canadian companies need to clear is now much lower.
Tim Shufelt