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<\/a><\/p>\nThe U.S. endured a double-dip downturn in the first half of 2002 as well, with the S&P 500 sagging six per cent and the TSX advancing more than three per cent. What do you know? Crude oil soared 30 per cent, yet again, and Canadian energy shares ran up 20 per cent and were the clear reason for the \u2018delta\u2019 in overall performance between the two countries.<\/p>\n
And as the dotcom bubble burst in 2000, the \u201cgrowthy\u201d U.S. stock market slumped nine per cent while the TSX increased a healthy 13 per cent. Once again oil rose 106 per cent and the TSX energy space soared by 97 per cent. And in that 1994 period when the Fed began the mother of all tightening cycles, U.S. financials really took it on the chin and the S&P 500 dipped one per cent while the TSX firmed up 3.5 per cent \u2014 and as a final exclamation point, oil prices were up 19 per cent and this helped the TSX energy complex to a 10.5 per cent gain.<\/p>\n
This whole discussion seems to raise some eyebrows, as many are surprised that the Canadian stock market can indeed generate a positive return and minimally protect capital as the U.S. heads into a bear market and\/or recession. But this is not an opinion, it is a fact \u2014 it has happened in the past, and for periods longer than six months too, not merely six weeks.<\/p>\n
It is, however, a case where the circumstances must fit, as in when oil and commodities, generally speaking, are in rally mode. You see, commodity prices are more influenced by China than by the U.S. \u2014 the former is still so \u201cgoods-driven\u201d while the latter is \u201cservices driven.\u201d<\/p>\n
For example, the correlation between the Chinese economy and the CRB Index is over 80 per cent whereas the correlation with the U.S. economy is 68 per cent. So when China is growing just enough or when we get supply discipline from global producers to such an extent that commodity inflation comes to the surface, the Fed generally tightens policy. All the more so when we are late in the cycle. So actually, the commodity bounce is often at the root of the rate hikes that generate the U.S. recession. As for those who don\u2019t believe in \u201cdecoupling,\u201d Canada did not incur an official recession in 2001 during the tech wreck and the U.S. recession that began in late 2007 only became a problem for Canada nine months later when the Lehman and AIG collapse caused a near-global depression.<\/p>\n
The Canadian stock market, given its global nature, is actually only 68 per cent correlated with Canadian GDP, but guess what? Given its still-high commodity exposure, it is 84 per cent correlated to the Chinese economy! That is even higher than the 78 per cent correlation that Canadian stocks have with the U.S. economy, but take note that even the U.S. economy is more of a dominant force on Canadian equities than Canadian GDP! Do you not see all those comfy green TD couches along the entire U.S. east coast?<\/p>\n
But what is really special about these periods of late-cycle U.S. market and economic behaviour, is that the best place to hide traditionally is the Canadian energy sector. This part of the Canadian equity space has the lowest correlation of all to the U.S. stock market \u2014 just a 34 per cent relationship (not to mention just a 23 per cent correlation to U.S. GDP). For the broader material sector, the correlation to the SPX is a mere 18 per cent (by way of comparison, TSX Industrials have a 95 per cent correlation to the SPX, and the Canadian Consumer stocks are not far behind; Financials have an 80 per cent correlation).<\/p>\n
David Rosenberg is chief economist and strategist at Gluskin Sheff + Associates Inc. and author of the daily economic report, Breakfast with Dave.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"The Canadian market is a more effective hedge against inflationary pressures, which is why Canada always outperforms the U.S. late in the cycle<\/p>\n","protected":false},"author":578,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/7721"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/578"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=7721"}],"version-history":[{"count":1,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/7721\/revisions"}],"predecessor-version":[{"id":7722,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/7721\/revisions\/7722"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=7721"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=7721"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=7721"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}