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Posthaste: Why it might be time to pile back into Canadian stocks Back to video

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An indicator from the Bank of America‘s global strategy team just turned positive for the first time in 18 months, signalling the tide could be turning for Canadian stocks.

Historically when BofA’s Canada Cycle Indictor has been positive the S&P/TSX has outperformed the S&P 500 60 per cent of the time by 4.2 per cent over a 12-month period, said Ohsung Kwon, equity and quant strategist at BofA Securities.

The second quarter saw the TSX 60 emerge from its earnings recession, with results growing 12 per cent year over year, beating the S&P 500’s 10 per cent gain, his report said. It was the strongest performance since the third quarter of 2022.

The Canadian exchange is also trading at the steepest discount to its American counterpart in history, said Kwon. Only three of 11 sectors, tech, industrials and materials, are at a premium compared to their United States peers, he said.

With the interest rate differential between the two countries widening and economic growth differential narrowing, conditions are shaping up for the TSX to outperform.

The Bank of Canada was the first G7 central bank to cut its policy rate and BofA economists expect further cuts will bring the rate to 3.75 per cent by the end of the year.

Given that rate cuts work much faster on Canada’s economy than the United States’, “a cutting cycle should also result in a bigger boost to the Canadian economy, in our view,” said Kwon.

“It should also alleviate concerns around rate pressure in housing, banks, and the overall consumer, which is broadly positive for the TSX,” he said.

BofA economists expect Canada’s economic growth to outpace U.S. GDP by year-end.

“A narrowing growth differential from a record level, combined with the widening rate differential …, should result in a more favourable macro backdrop for the TSX,” he said.

Canadian bank earnings got underway today with Toronto-Dominion Bank missing expectations.

In a separate report, BofA strategists forecast weak loan growth and rising credit costs for Canadian banks, with capital priorities shifting from building to share buybacks.

But the potential of a faster decline in interest rates in Canada could give banks here an advantage over their U.S. peers, said strategists Ebrahim H. Poonawala and Gabriel Angelini.

“Lower rates should not only alleviate the pressure on the Canadian consumer due to mortgage repricing, but also increase the attractiveness of the dividend yields,” they said.

Their top picks for Canadian banks are Royal Bank of Canada and Bank of Montreal.

There are caveats to the brighter outlook for Canadian stocks. The TSX will need higher commodity prices for sustained outperformance, said Kwon.

But significantly, the Canada Cycle Indictor is rising when other BofA indicators such as the U.S. Regime, Global Wave and Industrial Momentum, are starting to weaken.

This suggests “Canada could be an attractive alternative in the muddled macro environment,” said Kwon.

Some Canadian buys on Bank of America’s list include Barrick Gold Corp, Cameco Corp., Shopify Inc., Magna International Inc., Rogers Communications Inc., Telus Corp and the nation’s two main railways.

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Apparently, America’s job market is in worse shape than we thought.

A preliminary revision for nonfarm payrolls released yesterday shows data overestimated the number of workers on payrolls by 818,000 for the 12 months leading up to March — or by about 68,000 each month.

That is the biggest downward revision since 2009.

The change suggests that the United States labour market started to slow much earlier than originally thought. Markets only started to fret earlier this month with the release of July’s jobs report.

“As for the Fed, today’s announcement will only reinforce its conviction that the labour market is cooling, and make it more likely to cut policy rates significantly over the coming months,” said Jocelyn Paquet, economist with National Bank of Canada.

• Canadian bank earnings season kicks off today with Toronto-Dominion Bank
• The Kansas City Fed’s annual economic symposium begins in Jackson Hole
• Today’s Data: United States existing home sales for July
• Earnings: Intuit Inc., Ross Stores Inc.

• Canada’s big pensions are ready for airport privatization. Are Canadians?
• Howard Levitt: Ageism is alive and well in Canadian workplaces
  
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Identifying undervalued stocks rather than looking for fast-growing companies floundered from its relative-performance peak in early 2007, but longtime investor Rob Arnott says unless you truly believe that value companies will never come back, they deserve a decent allocation in your portfolio. Read on for four reasons value investing is due for a big comeback.

Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line with your contact info and the gist of your problem and we’ll try to find some experts to help you out, while writing a Family Finance story about it (we’ll keep your name out of it, of course). If you have a simpler question, the crack team at FP Answers, led by Julie Cazzin, can give it a shot.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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