After Best Rally Since 2000, Canada Stocks Face a Wall of Worry

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(Bloomberg) -- The best start to the year since 2000 for Canada’s stock market brought a surge of superlatives -- fresh highs and record profit forecasts.

Yet, expectations for the rest of the year are nowhere as rosy as the rally seen in the first quarter. The S&P/TSX Composite Index will sign off 2019 at 16,940, according to the average of six estimates compiled by Bloomberg. While that’s 18% above its 2018 close, it’s a mere 1.7% gain from the end of September.

The market’s wall of worry has only gotten higher. It could be last year’s fourth-quarter sell-off that’s prompting investor anxiety about a possible rehash this time around. May be it’s the lingering U.S.-China trade war that has investors worried. Or political turmoil across the world.

After Best Rally Since 2000, Canada Stocks Face a Wall of Worry

Expectations that the Fed would cut rates had investors anticipating narrower interest margins from banks in the U.S. and Canada, and that sent their stocks lower, said Laura Lau, senior portfolio manager at Brompton Corp. Financials make up nearly 33% of Canada’s benchmark. Oil stocks, which account for more than 10% of the gauge, have also been the pariahs of the market.

After climbing more than 12% at the start of the year, Canada’s benchmark stock gauge gained less than 2% in each of the two subsequent quarters. That’s still the longest quarterly rally since March 2017.

“September was an important inflection point for the TSX,” said Tina Normann, technical research analyst at Eight Capital. “The composite broke out to new highs driven by financials. This coincided with the Canadian 10-year yield stabilizing along with most global yields,” she said.

After Best Rally Since 2000, Canada Stocks Face a Wall of Worry

Still, signs of fatigue were visible at the peak of benchmark’s ascent. At its Sept. 20 high, the S&P/TSX Composite flirted with the overbought level and quickly slipped back down, snapping a four-week winning streak.

In the U.S., traders are bracing for a big shock as downside options that expire within the next month become expensive.

After suffering from a volatile third quarter, caution prevails ahead of more U.S.-China trade talks next week, the upcoming profit reporting reason, federal elections where Prime Minister Justin Trudeau is fighting for his political life and Bank of Canada’s monetary policy decision. These events are slated for October alone.

After Best Rally Since 2000, Canada Stocks Face a Wall of Worry

The sight of an inverting U.S. Treasury yield curve and President Donald Trump’s relentless tweets about trade relations with China has put a shine on defensive and value stocks. Utilities, real estate and financials were among the top gainers in the third quarter and in September:

After Best Rally Since 2000, Canada Stocks Face a Wall of Worry

“One thing is clear, we’re definitely not going to be seeing interest rate hikes any time soon,” John Goldsmith, head of Canadian equities at Montrusco Bolton said on BNN Bloomberg on Tuesday. “That definitely puts the onus on what’s considered to be defensive sectors.”

Earnings season will be key to monitor the effects of slowing global growth and any spillover effects of the 18-month-old trade war. While profit estimates for companies listed on the Canadian benchmark have grown, the U.S. paints a different picture as CFOs have preemptively cut their forecasts at a rate not seen in three years.

“Four quarters of decelerating earnings may have reached a bottoming point primarily due to low interest rates and easier comparisons,” Normann said. “This creates a path for stronger earnings growth in 2020.”

©2019 Bloomberg L.P.

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