Falling commodity prices blunt S&P/TSX advantage

An oil and gas pump jack in Alberta on May 6, 2020.Todd Korol/Reuters

The fall in resource prices over the past month is a source of hope and concern for the global economy. A decline in energy, metals and agricultural commodity prices to around three-month lows should help dampen runaway inflation plaguing many countries. Yet at the same time, weakening commodity prices reflect growing fears that a recession will crush demand for commodities such as oil, copper, timber and wheat.

The fall in prices had another effect that Canadian investors are now feeling directly: the S&P/TSX Composite Index looks deadly again.

Over the past year, as global equity indices have begun to pull back from their COVID-19-related recovery highs, the pullback on the resource-heavy TSX has been much less severe. This outperformance has served as a buffer of wealth in a country where investors are prone to home bias – the average Canadian investor is estimated to hold 60% of their portfolio in domestic equities.

Rolling over resource stocks clears this buffer. On Thursday, major benchmark oil prices fell below levels they were at before Russia invaded Ukraine. This contributed to a sharp drop in Canadian energy stocks. Since the beginning of June, the S&P/TSX oil and gas sub-index has lost more than 21% of its value, bringing it back to its February level.

As a result, the Canadian benchmark underperformed the S&P 500 and the Dow Jones Industrial Index by around 6% during this period.

Tight commodity supplies could push resource stocks higher again, as some analysts predict, but for now recession fears and a strong US dollar are dragging them and Canadian investors’ portfolios down .

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