Market Perspectives: The Great Divergence

Lyle Stein - December 23, 2014

In the Canadian marketplace, Autumn came hard and Winter is looking nuclear. Since September 22, the TSX has fallen 9%, with Energy stocks down 34% and Materials stocks down 10%. The S&P/TSX Composite Index has gone from being one of the best in the world as of September 2014, to one of the worst – a divergence of considerable magnitude.

Divergence, in market speak, occurs when one security or asset class goes in the opposite direction of another. While divergence may signal risk, to us, it also signals opportunity. The key to divergence is to understand it, not to fear it.

2014 is historically unique. The bond market has seen yields go ever lower as investors seek the perceived safety of sovereign and other highly rated debt. At the same time, commodity prices have slid on fears of slowing global growth, reinforcing the bond trade as a place to hide. The bond and commodity markets are looking at a world through the lens of stagnation. Meanwhile, equity markets, particularly US equity markets and so-called “safe” growth stocks, (namely Consumer, Technology, and, to a lesser extent, Utilities), continue to hit new highs. While one part of the market is indicating “the party is over,” the other is saying, “happy days are here again.” Central banks around the world are doing what they can, printing money to promote the kind of growth that will benefit commodity markets, yet the equities that would benefit are priced for economic oblivion.


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