Posted at 4:00 p.m.
How to explain that the daily variations of the S&P/TSX index are very often similar to those of the S&P 500, while their composition is different?
Jocelyn Montour
The variations of the S&P/TSX index can indeed often resemble those of the S&P 500 index. Over a long period, however, the evolution of the price of the two indices can diverge greatly, says portfolio manager Ruben Antoine.
This expert from the firm Tulett, Matthews and Associates points out that the United States is Canada’s largest trading partner. “The economy of our country is therefore closely linked to the American economy. This great relationship between the market conditions of the two countries results in a high correlation of their respective stock indices, which is why they can fluctuate in tandem. »
PHOTO MARCO CAMPANOZZI, THE PRESS
Ruben Antoine, of the firm Tulett, Matthews and Associates
In the short term, explains Ruben Antoine, the price of the shares comprising each index varies according to the buying and selling activities of investors and other market participants. “These buying and selling activities are themselves influenced by investors’ emotions and reactions to market conditions that affect the entire North American region. »
The correlation between the S&P/TSX and S&P 500 indices tends to increase during bear market periods, such as since the beginning of the year, says Ruben Antoine.
Investors react similarly to economic news such as the announcement of interest rate hikes or runaway inflation.
Ruben Antoine, of the firm Tulett, Matthews and Associates
The composition of the S&P/TSX index is different from that of the S&P 500 index. The main index of the Toronto Stock Exchange includes approximately 240 large Canadian companies while the S&P 500 is made up of 500 of the largest publicly traded companies. in the USA.
However, these same large corporations that populate each of the indices generally do business in both countries and own businesses on both sides of the border. “This overlap reinforces the synchronization of the movements of the two stock market indices”, says Ruben Antoine.
Longer term
Over several months or years, the S&P/TSX and S&P 500 indices will not necessarily move in parallel.
For example, our expert argues that from 1er January of this year through April 30, the S&P/TSX was down about 1% while the S&P 500 was down some 12%, a huge disparity illustrating that the two indices don’t always react same way.
The S&P 500 has a large exposure to the technology sector, less favored in a context of rising interest rates, while the S&P/TSX is less affected given its concentration in the more traditional sectors of finance, energy and raw materials that benefit from the current economic and geopolitical environment.
“Going back further in the past, we can also recall the famous ‘Lost Decade’ in the United States, when the American index had a negative return of 2.6% between 2001 and 2010 while the Canadian index performed 6.6%. The following decade offered a turnaround. The S&P 500 outperformed the S&P/TSX by nearly 11% between 2011 and 2020,” says Ruben Antoine.
In the long term, he points out, the movement of each index can differ greatly according to the rise or fall of the sectors and companies that make it up, as well as the advancement or contraction of the economy of each country.
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