The forecast for Canadian equities is brightening so quickly that it’s making me uncomfortable. As legendary Merrill Lynch strategist Bob Farrell was fond of saying, “When all the experts and forecasts agree — something else is going to happen.” Or maybe my skepticism is just typically Canadian.
At BofA Securities, equity and quant strategist Ohsung Kwon reported that a preliminary update of his proprietary Canada Cycle Indicator indicated the sixth straight month of improvement. The May recovery resulted from widening bond yield differentials versus the U.S., commodity prices and a better earnings revision ratio – more upwards moving profit forecasts than downwards. Inflation and leading economic indicators are the other two data sets used in the CCI methodology.
BofA’s CCI, which uses three month rolling average data is now close to positive territory at -0.18. The preliminary one-month result is above zero which is important. When the three-month CCI is positive, the TSX has outperformed the S&P 500 by an average 4.2 percentage points over the next 12 months.
Over the past five years, the S&P 500 generated a total return of 107.7 per cent in Canadian dollar terms, almost doubling the S&P/TSX Composite’s 58.9 per cent. At some point, a degree of reversion to the mean has to happen and domestic stocks outperform. The recent data do seem promising, enough that the process of writing this did a lot to allay my cynicism, and strongly consider more domestic equities.This is the Globe Investor newsletter, published three times each week.