TSX expected to move higher despite hitting 20,000, but risks of correction remain
Jun 3, 2021 by MarketDepth | 17 views
TORONTO — Canada’s main stock index still has room to move higher this year even after hitting 20,000 points for the first time Tuesday, although the winding down of stimulus measures could put a damper on that growth, experts say.
The Toronto market has the wind at its back despite gaining 14.6 per cent so far in 2021 to outpace all North American stock markets and is up 78 per cent from the March 2020 lows, said Mike Archibald, vice-president and portfolio manager with AGF Investments Inc.
“It continues to exhibit good momentum characteristics and I think if cyclicals continue to work and the global demand picture continues to improve, Canada is going to be a good place to be for money,” he said in an interview.
Commodities have fuelled the charge with materials rising on higher gold prices and energy recovering from years of underperformance. Crude oil prices have reached more than two-year highs amid an anticipated growth in demand from people travelling more and life returning to a new normal following COVID-19 lockdowns.
However, what’s most likely to prompt a correction is if the U.S. Federal Reserve begins to taper its monetary stimulus to prevent the economy from overheating. The Bank of Canada has already said it would do so.
“That’ll likely give the market a little bit more pause and you’ll probably see a bit of a pullback in broader equities. And of course there’s always the unknowns that happen in this business,” Archibald added.
The climb higher is being supported by good corporate earnings that are being driven by an improving economic environment as COVID issues are starting to “appear in the rear-view mirror,” said Kevin Headland, senior investment Strategist at Manulife Investment Management.
“The risk is more like an exogenous shock,” he said, noting that valuations are still elevated.
“It’s not as expensive as it once was, so any type of shock to the market that’s unexpected could quickly drive the market lower.”
A small dip could quickly accelerate to something bigger if expectations build about a long-lasting shock to the market.
But Headland said he remains optimistic that the TSX still has some decent upside potential, noting that the Canadian equity market has been undervalued relative to the U.S. and other markets for quite some time.
The composition of the TSX/S&P composite index should also help as the focus continues to shift amid the economic reopening to energy, materials, financials and industrials from growth sectors like technology that outperformed during the downturn. That lockdown play helped Shopify Inc. to become Canada’s most valuable company.
Archibald said he expects the summer could be a more volatile period if the Fed starts talking about tapering, which could unnerve investors who are already on edge about rising inflation.
A five to 10 per cent correction is possible, something he describes as “very normal.”
“I think most market participants that have cash will be buying that as we move into the fourth quarter. I still think equities look fairly attractive just given the growth trajectory we’re likely to see for 2021.”
Going back 100 years, there’s a 10 per cent correction an average of once a year, said Michael Currie, vice-president and investment adviser at TD Wealth.
“It wouldn’t be unusual to see some slowdown in the summertime,” he said.
Currie said hitting 20,000 is a nice milestone that grabs attention even though the climb up isn’t mathematically significant.
“It generally does give people a bit more optimism in the market that things are heading in the right direction even though monetarily it’s not a huge difference,” he said.
The TSX’s climb has caught some analysts a bit by surprise and forced them to revisit their forecasts for the year.
Candice Bangsund, portfolio manager for Fiera Capital, upped her estimate after originally predicting the TSX would end the year at 19,000.
Sentiment was buoyed by the U.S. central bank’s bullish outlook for economic growth and reduced unemployment that should keep its benchmark interest rate near zero through 2023 despite increased inflation.
The TSX hit 19,000 for the time in March, 70 days after reaching 18,000. It took another 77 days for it to reach 20,000.
Canada’s main stock index closed up 245.02 points to 19,976.01 on Tuesday after trading as high as 20,022.13.
This report by The Canadian Press was first published June 1, 2021.
Ross Marowits, The Canadian Press