Mixed results for Canada’s stocks

Within the 10 industrial sectors of the stock market indices, there are diverging trends. Trends in price and earnings go in different directions in some industries.

This uneasy balance between positive and negative can change swiftly, should the market – following the lead of the New York Stock Exchange – react violently. Over the past half-century, the market typically has made its big moves in September or October.

The S&P/TSX composite index dropped by 1% in the six-month period ended Aug. 31. Year-to-date, the index has gained by 1.8%; during the past 12 months, it has risen by 5.9%. Furthermore, over the most recent six months, index earnings dropped by 26% and indicated dividends gained by 2%.

Six-month changes in index prices, earnings, dividends and dividend yields are useful in identifying the beginning and end of trends. The measurement period is more sensitive than year-to-year comparisons and less volatile than three-month changes.

The usual unanimous picture of earnings and price trends within the market’s 10 industries is missing. This is evident in the financial services industry, which alone accounts for 35% of the Canadian market. This industry is anything but a monolith. It’s divided into three major sectors, and one of those subdivides into two more subgroups.

Banks, of course, are the biggest sector in the industry. They have revived this year, but not by much. The banking sector’s subindex’s six-month price gain is only 1%, while earnings gained by 2% and indicated dividends increased by 5%. The last “buy” signal for banks, given by the six-month change in the subindex yield, was in September 2011.

Insurance – a reviving sector, thanks to the prospect of higher interest rates – recorded a 9% price gain and a 47% jump in earnings. Relative to the market, the insurance sector is 10% stronger than it was six months ago.

Real estate is the divided third giant in the financial services industry. This sector’s two halves had been headed in different directions until August. Real estate investment trusts (REITs) started to drop in May while real estate management and development stocks continued to gain.

That changed in August, when the management/development stocks joined the downward tide. As a result, this subsector lost 5% in value and began underperforming the market. Earnings also dropped by 2%. Through Aug. 31, REIT unit prices dropped by 15% over the previous six months while their earnings dropped by 16%. But their dividends rose by 3%.

Consumer stocks, which represent 9% of the overall stock market, remain the hottest group despite diverging trends within consumer staples.

Among the five industries within the consumer discretionary category, six-month price gains range from 6% (media) to 45% (automobiles and components). All five industries – media, autos, consumer durables and apparel, consumer services and retailing – are outperforming the market.

There are hints of trouble in the media and retailing industries, though, as earnings momentum is negative. The earnings for media companies dropped by 42% in the six months ended Aug. 31, and retailing earnings were off by 25%.

Two industries form the consumer staples category: consumer staples retailing and food/beverage/tobacco. Retailing remains bullish, with the subindex up by 17% and earnings up by 8%, but food/beverage/tobacco has faltered. Its subindex dropped by 8% and relative performance lagged despite a 17% rise in earnings.

The big unknown is energy, which represents 25% of Canada’s overall stock market. As oil prices rise and world tensions tighten again, the stock market signals caution in this area.

Integrated oils, exploration and production stocks, and storage and transportation stocks (pipelines) comprise the three largest industries within the energy category. Integrated oils gained by 4% over the six months; exploration/production stocks dropped by 1%, and pipelines dropped by 3%.

Earnings for all three industries kept dropping, with pipeline earnings down by 15%, integrated oils down by 34% and exploration/production down by 44%. The group’s dividends jumped by 22%.

There is a bullish indication, though: both the integrated oils and exploration/production subindices began to show better price strength relative to the market.

Finally, plunging commodities prices have trimmed the materials category to a 13% weighting of the overall stock market. The most robust industry, paper and forestry products, has been volatile. Its earnings and dividends rose dramatically, by 324% and 263%, respectively, in the six months ended Aug. 31, but the price subindex dropped by 3%.

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