The Toronto Stock Exchange has been a bitter disappointment for Canadian investors so far this year.
While the Dow continues to hit new records and European exchanges post better returns than anyone expected last January, the TSX has been limping along around the break-even level for most of 2017.
As of the time of writing, the TSX Composite was down 0.4 per cent for the year. That's by far the worst performance among all the major global stock indexes.
It should come as no surprise that some people are worried. One reader wrote last week: "I'm starting to lose my nerve and I have learned from you that that's the worst time to make investment decisions. However, my profits are evaporating very quickly and some gainers have turned into substantial losses as I was buying on what I thought were dips. I can't find any reason for this sell off and I'm afraid it's going to get a lot worse. I'm now 67 and maybe it's time to pull way back."
I'm sure there are many other people in his position. The TSX Composite hit a record high of 15,943 in late February but since then it has been steadily drifting lower and recently fell below its 50- and 200-day moving averages. As I write, the index is now down 4.6 per cent from its February high. That's a long way from what is normally considered correction territory (a drop of 10 per cent or more) but it's enough to cause concern, especially when south of the border the S&P 500 is ahead nine per cent.
There is no doubt in my mind that stocks are overpriced and the market is due for a pullback. However, it has been slow in coming. It's not as if investors are caught in the grip of irrational exuberance, rather they seem to be locked into a state of blissful apathy. No amount of bad news seems to shake their confidence that, with no recession on the horizon, markets will continue to push higher.
So why hasn't Canada followed Wall Street's lead? Our problem is overconcentration. Just look at the composition of the TSX Composite. Financials account for 33.5 per cent of the index, with energy at 20.7 per cent, and materials at 11.9 per cent. Those three sectors make up almost two-thirds of our stock market!
None of them are doing well. Financials, which comprise one-third of the index by themselves, are ahead only 1.5 per cent year-to-date. Materials are ahead 0.3 per cent. The energy sector has dropped 21.3 per cent this year (over 8 per cent in June alone), putting it into bear market territory.
So why are we floundering compared to the rest of the world? There are several reasons.
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