TSX lags recovery in Dow industrials

“We’ve been thinking that we would probably have very high single-digit returns for the indices in the U.S. and in Canada, likely a little shy of the U.S.,” Gorman said Wednesday in an interview.

“Whereas last year the U.S. outperformed Canada by a very wide margin, this year it will be closer.”

Weighing on the TSX have been the big three sectors which make up the lion’s share of the Canadian market — financials, materials and energy — and all remain well off their highs of a year ago as they have all been hit one way or the other by worries over the possible default of sovereign debt in Europe and slower growth in China.

“You’ve got basically three horses,” said Adrian Mastracci, a portfolio manager at KCM Wealth Management Inc.

“All you need is one of them being on the negative side and even if the other two are pulling in the right way, you still have a problem.”

Toronto’s S&P/TSX Composite Index hit a close at 15,073.13 on June 18, 2008, its highest ever. Though it has recovered from its lows of the recession, on Wednesday it sat around the 12,700-point mark.

The big players in those sectors have stocks that exert a big gravitational pull on the TSX/S&P composite index.

The Royal Bank (TSX:RY), which faces the prospect of a downgrade by debt rating agency Moody’s because of its exposure to a potential slowdown in global capital markets, is off about 10% from its highs of last year.

Sun Life Financial (TSX:SLF) and Manulife Financial (TSX:MFC) are also both off roughly 30% from their highs of 2011.

Meanwhile, PotashCorp (TSX:POT), the world’s largest potash producer, is down roughly 20% from its 52-week high, while Barrick Gold (TSX:ABX), the world’s biggest gold producer, sits more than 10% off its recent high.

Though the Dow industrials average includes just 30 stocks, they offer a broad look across the U.S. economy. On Tuesday it crossed the 13,000-point mark for the first time since May 2008, when the Lehman Brothers investment bank was solvent, unemployment a healthy 5.4% and the worst of the Great Recession months ahead.

While it includes banks and oil companies like Bank of America, JP Morgan Chase and Exxon Mobil, the Dow has a greater weighting to other sectors like technology and consumer stocks with the inclusion of stocks like Microsoft, which is trading near levels not seen since before the financial crisis in 2008.

Fast food chain McDonald’s Corp., another Dow component, has also seen its stock march steadily higher and is trading near a record high for the world’s largest restaurant company.

Gorman noted the Dow outperformed both Toronto and the S&P 500 indexes as the shares of some of the largest companies in the U.S. caught up in 2011 to the gains already made by the smaller companies.

“Those big company shares were really quite inexpensive by most measures. Their shares had not done much for a decade,” he said.

Despite the losses in 2011, the Toronto market has been headed higher this year as global prospects brighten somewhat.

The S&P/TSX composite index is up nearly six per cent since the beginning of the year as it appears Europe’s sovereign debt troubles may have a solution and the U.S. economy appears to be gaining steam.

Greece is working to pass emergency laws that will cut spending as part of new austerity measures demanded by creditors in return for the rescue loans and the in the U.S., hiring has picked up in recent months with five straight months of growth in jobs.

Gorman said that going back to the late fall of last year stocks have been picking up.

“A lot of concerns surrounding Europe, which really took a toll on the market last fall, have been alleviated to a degree. It doesn’t mean we’re through all of those issues, but some of the worst fears have not been realized and probably won’t be,” he said.