Legal Marijuana, Oil Send Canadian Stocks to Record High

(Bloomberg) -- Canadian stocks surged to a record high on Wednesday, driven by soaring cannabis stocks and a rebound in the energy sector.

The S&P/TSX Composite Index rose 0.7 percent to 16,424.82 at 10:09 a.m., above the intraday and closing high on Jan. 4. After a bout of volatility that sent global markets plunging in February, it took nearly six months for Canadian stocks to claw their way back to levels last seen at the beginning of the year. The S&P 500 Index is still trading about 3.6 percent below its Jan. 26 high.

Legal Marijuana, Oil Send Canadian Stocks to Record High

“It’s odd, we had the Canadian economy accelerating through about mid-2017 and the TSX was fading and lagging the U.S., and now the economy’s really coming off the boil and the TSX is back at a record high,” said Robert Kavcic, senior economist at BMO Capital Markets.

Gains Tepid

Pot stocks jumped after Canada’s upper house voted to approve the legalization of recreational marijuana, putting the country on track to see the drug sold in stores some time after September. Canopy Growth Corp. rose 3.3 percent to C$43.92 for a market value of C$8.7 billion ($6.5 billion) after touching a record earlier.

Energy stocks, which account for about 19 percent of the index, have gained 11 percent since the beginning of the second quarter, making them one of the primary drivers of recent gains. The smaller health-care and technology sectors have done even better, posting gains of 22 percent and 18 percent respectively quarter-to-date.

The best-performing company year-to-date is Canada Goose Holdings Inc., up 128 percent, followed by MEG Energy Corp. and Shopify Inc.

Still, Canada’s year-to-date performance is tepid at best. The benchmark is up 1.3 percent since the beginning of 2018, putting it in the middle of the pack of developed-world stock markets. By comparison, the S&P 500 is up 3.7 percent in 2018 and Norway, the top performer, has gained 9.4 percent.

Strategists expect the S&P/TSX to end the year at 17,068, a further gain of 3.9 percent, according to the average of 10 estimates compiled by Bloomberg. That compares with an average year-end forecast of 2,941 for the S&P 500 in the U.S., a projected gain of 6.1 percent from current levels.

Kavcic said he doesn’t expect the momentum to continue, as he doesn’t see oil prices rising much beyond current levels and believes tighter monetary policy and slower credit growth will weigh on Canadian financials.

“Fundamentally, it’s not a negative environment but it might argue for maybe a little bit more modest performance from here on out for Canada stocks,” he said.

©2018 Bloomberg L.P.