Canadian stocks see clean sweep, rebound across all major asset classes in January

Market sentiment shifts, seeing equities, corporate bonds, the loonie and crude oil rise in unison through the first month of the year

Tim Shufelt February 1, 2019 | The Globe and Mail

Canadian stocks stormed back in January with the biggest monthly advance in nearly a decade, swiftly negating the losses from an ugly December sell-off.

The rebound was part of a clean sweep across all major asset classes, which saw equities, corporate bonds, the loonie and Canadian crude oil rise in unison through January as investors looked for bargains.

The biggest losers of the selloff became January’s biggest market movers, as investors snapped up shares of the big banks and energy stocks at discounted valuations.

Bank shares had tumbled partly on concerns about rising interest rates, and Canadian oil shares dropped amid pressure on oil prices.

“In December, people were afraid the market was unraveling,” said Peter Imhof, portfolio manager at AGF Investments. “So this was a very important month.”

But market sentiment shifted sharply late last month and into January. Assurances from U.S. and Canadian central banks that they would be patient with interest-rate hikes gave investors confidence to bid up stocks.

All but 27 stocks in the S&P/ TSX Composite Index finished January in positive territory. The index itself rose by 8.5 per cent, marking the biggest monthly gain since May, 2009, when the recovery from the global financial crisis and ensuing recession was just getting under way. The forward price-to-earnings ratio for the Canadian index, which fell below 13 in December, has since risen closer to its long-term average at more than 14.

Although just one month into the year, Canada sits close to the top of the rankings of developed market equity performance, second only to Austria.

And for the first time in nearly two years, the S&P/TSX Composite Index is beating the S&P 500 on a trailing 12-month basis.

“If we can get some stability in energy prices, we’ll have a good shot at outperforming U.S. this year,” Mr. Imhof said.

January also saw a big improvement in domestic crude oil pricing, with Western Canadian Select ending the month at more than US$44 a barrel, as Alberta introduced measures to curtail production.

In November, Alberta crude hit a low of just US$13.46, adding domestic economic strains on top of what was shaping up to be a global slowdown in growth.

As the effects of trade tensions and competing tariffs started to bear out in economic readings, the U.S. Federal Reserve hiked its policy rate in December, fueling concerns that the world’s central bankers would bring about a recession with excessive tightening, said Bank of Montreal senior economist Sal Guatieri.

“At that point, central bankers laid on the patience mantra pretty thick,” Mr. Guatieri said. “That’s gone a long way to comforting investors.”

The ensuing rally has been every bit as dramatic as the sell-off.

In 25 trading days since hitting bottom, Canadian stocks have packed in a decent year’s worth of gains, as a 12.8-per-cent rise has taken the S&P/TSX Composite Index back to where it was in mid-October.

Big swings like that are to be expected of older bull markets, said Craig Basinger, chief investment officer at Richardson GMP.

“A late-stage market tends to be more volatile, because the bulls and bears start to wrestle,” Mr. Basinger said.

It’s also not uncommon in this kind of a market to see synchronized market movements, even across asset classes that tend to be negatively correlated, Mr. Basinger said.

Canadian defensive and cyclical stocks alike advanced in January. As did the Canadian dollar, which climbed by 3.9 per cent in January to lead the Group of 10 currencies.

Canadian corporate bonds, which historically move in the opposite direction of stocks, also saw price gains, as the iShares Canadian Corporate Bond ETF rose by 1.8 per cent. Even gold, which tends to thrive amid heightened fear and volatility, had a solid month.

But after experiencing a correction and recovery in hyperspeed, Canadian investors could use a bit of calm in the stock market, potentially establishing a base on which equities could build through the rest of the year, Mr. Imhof said.

“It would actually be nice if we could just trade sideways for a bit.”

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