US vs Canadian markets: how they move together
US and Canadian stock markets often rise and fall together, but not always. Here is why they are linked and why they sometimes go separate ways.
On most days, if US stocks rise, Canadian stocks rise too. But there are days, and sometimes whole years, when the two markets go very different ways. Here is why they are linked, and what pulls them apart.
Why they usually move together
Trade. The US is Canada's largest trading partner by far. When the US economy is strong, Americans buy more Canadian goods, from oil to cars to lumber. When it slows, Canadian companies feel it.
Shared investors. Large investment funds own shares in both countries. When those investors feel confident, they tend to buy in both places. When they get nervous, they often sell in both.
Linked interest rates. Bond yields in the two countries often move in the same direction, and the Bank of Canada keeps a close eye on what the US Federal Reserve does. Changes in rates tend to hit both markets.
Cross-listed companies. Many large Canadian companies trade on both the Toronto Stock Exchange and a US exchange, so their prices are linked across the border.
Why they sometimes go separate ways
The biggest reason is what is inside each market.
- The S&P 500 is the main US index. It has a large share of technology and communication companies. See What is the S&P 500.
- The S&P/TSX Composite is the main Canadian index. It leans heavily toward banks, energy and mining. See What is the TSX.
So a strong period for technology stocks tends to favour the US market. A strong period for oil and metal prices tends to favour Canada. In a year when both technology and commodities do well, the two can rise together. In a year when only one does, the gap can be wide.
The currency effect
When Canadians own US stocks, or Americans own Canadian stocks, the exchange rate also matters. If the US dollar rises against the Canadian dollar, US holdings are worth more when counted in Canadian dollars, even if their prices did not change.
This works the other way too. Returns can look quite different depending on which currency you count them in.
Size
The US stock market is many times larger than Canada's. It includes many of the world's biggest companies. Canadian investors who hold only Canadian stocks have less exposure to some industries, such as large technology and health care firms. That is one reason many Canadians also hold US or global investments.
The short version
- US and Canadian markets often move in the same direction because of trade, shared investors and linked interest rates.
- The S&P 500 leans toward technology; the TSX leans toward banks, energy and mining.
- That difference explains most of the times they split apart.
- Exchange rates change returns for anyone investing across the border.
This is general information, not investment advice.
Updated