Commodities

Plunging commodity prices blunt the S&P/TSX’s edge

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

The fall in resource prices over the past month offers cause for both hope and concern to the global economy. A drop in the prices of energy, metals and agricultural commodities to roughly three month lows should help ease the runaway inflation that plagues many countries. Yet at the same time, weakening commodity prices reflect mounting fears that a recession will crush demand for raw materials such as oil, copper, lumber and wheat.

The price plunge has had another effect that Canadian investors are now directly feeling – the S&P/TSX Composite Index looks mortal again.

Over the past year, as global stock market indices began to retreat from their COVID-19 recovery peaks, the pullback by the resource-heavy TSX was much less severe. That outperformance served as a wealth buffer in a country where investors are prone to home bias – it’s estimated the average Canadian investor holds 60 per cent of their portfolio in domestic stocks.

The reversal in resource stocks is erasing that buffer. On Thursday, major benchmark oil prices fell below the levels they were at prior to Russia’s invasion of Ukraine. That’s contributed to a sharp drop in Canadian energy stocks. Since early June, the S&P/TSX oil and gas subindex has shed more than 21 per cent of its value, taking it back to where it was in February.

As a result, the Canadian benchmark index underperformed the S&P 500 and Dow Jones Industrial Index by roughly 6 per cent over that time.

Tight commodity supplies could lift resources stocks once again, as some analysts predict, but for now recession fears and a strong U.S. dollar are dragging them down, along with the portfolios of Canadian investors.

Decoder is a weekly feature that unpacks an important economic chart.

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