The ongoing rise in cyclical and value stocks has led to the longest rally in Canadian stocks in more than 35 years.
The Toronto Stock Exchange (TSX) rose to a fresh record last Friday (October 22), extending its streak of gains to 13 straight days – its longest uninterrupted rally since 1985. The benchmark index has soared 22% this year, outpacing the U.S. S&P 500 Index’s 21% gain, thanks to its large weighting in commodity stocks.
Consumer stocks make up a small percentage of the TSX, which is heavily weighted toward financial firms, materials stocks and oil and gas companies. All three of these sectors are beneficiaries of accelerating economic growth, rapid inflation and the global energy crisis.
Together, banks, commodities and oil make up about 57% of the Canadian benchmark compared to just 17% for the S&P 500 index.
Foreign investors have also been flooding into Canada’s stock market this year. The nation’s equities are on pace to record the highest net inflow from overseas investors since 2017, adding more than $22 billion U.S. as of the end of August, according to Statistics Canada data.
The TSX is traditionally a destination for investors looking for a higher risk-reward ratio, with energy and mining stocks making up about a quarter of the index.
A rising Canadian dollar has also helped encourage capital flows from foreign investors. The loonie is the top-performing currency against the U.S. dollar among its G-10 peers this year, rising nearly 3%, partly because of higher prices for oil, lumber and other commodities.
In another potential boost, banks, which make up a fifth of the benchmark, are awaiting the go-ahead from the nation’s Office of the Superintendent of Financial Institution to boost dividends after socking away record amounts of capital during the pandemic.