Think back to early January. It was a time of widespread gloom, as stock markets started the year with their worst performance in decades.
In the midst of all that angst, an analyst at CIBC Wood Gundy made what seemed to be an audacious prediction: given the right circumstances, the TSX might be one of the top performing indexes in the world in 2016.
Sunil Bhardwaj has turned out to be more prescient than most people might have believed back then, although his timing was a bit off. He didn't expect the TSX to outperform until the second half of the year, and then only if oil prices moved higher the monetary stimulus boosted the economies of Europe and Japan.
The jury is still out on the latter but oil has indeed bounced off its lows. Moreover, the Canadian economy turned in a much stronger than expected performance in January, gaining 0.6 per cent. Durable good manufacturing led the way with a strong increase of 2.6 per cent in the month. And all this occurred before the extent of Ottawa's fiscal stimulus was known.
As a result, the S&P/TSX Composite was, unexpectedly, one of the best performers in the world at the end of the first quarter, with a gain of 3.7 per cent. The best that any of the big New York indexes could manage was a 1.5-per-cent advance on the Dow.
None of the major European indexes finished the quarter in the black. Asian markets floundered, with the Nikkei off 12 per cent and Hong Kong losing 5.1 per cent. Only Brazil's Bovespa index, which staged a huge rally in March after a long slide, and Mexico's Bolsa outdid the TSX in the quarter.
Almost all the TSX sub-indexes contributed to the result by posting positive returns. The materials sector, which accounts for 11 per cent of the TSX, was the biggest contributor with a 19-per-cent gain, thanks in part to a strong performance from the gold miners. Energy stocks, which make up 19.3 per cent of the Composite, staged a modest rally, gaining 6.6 per cent during the three months. The largest sector, financials (37.9 per cent), was a bit of a drag, adding only 2.5 per cent in the quarter.
Income-oriented stocks, which had been hit by fears of interest rate increases, generally fared well. The telecom sector was especially strong, posting a gain of 9.7 per cent in the quarter. Real estate investment trusts (REITs) did well, gaining 9 per cent. We also saw strong results from other income-oriented sub indexes including utilities (up 8.3 per cent) and the S&P/TSX Composite High Dividend Index (rising 7.3 per cent).
The notable laggard was the TSX/S&P Preferred Share Index, which lost 6.9 per cent over the three months. Low yields on Government of Canada bonds have been a drag on the prices of reset preferreds, which account for the heaviest weighting in this sub-index.
So much for the first quarter. The question now is whether the TSX can maintain its momentum in the face of continued weak oil prices and concerns abut future bank profits. The short answer is: maybe.
The U.S. economy continues to perform well, which is good news for our exporters who are finally starting to benefit from the weak loonie. The stimulus program announced in the March budget is projected to add 0.5 per cent to Canada's GDP this year. That doesn't seem like a lot but if the overall economy does reasonably well, it will provide a useful boost. A further lift in the oil price would help, although the continued oversupply makes that somewhat dubious.
My view is that the U.S. markets will overtake the TSX by year-end, because of their broader diversification and the continued growth of the American economy. But Canada has been a pleasant surprise so far and if things fall into place we could see a year-end gain in the high single-digit range.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. Follow him on twitter @GPUpdates and on Facebook.