A surge in cyclicals and value stocks has vaulted the Canadian stock market to its longest winning streak in almost four decades.

The S&P/TSX Composite Index rose to a fresh record Friday, extending its streak of gains for a 13th straight day - its longest run since 1985, according to data compiled by Bloomberg. The benchmark has soared about 22 per cent this year, outpacing the S&P 500 Index’s 21 per cent rise, thanks to its large weighting in banks and commodity stocks. 

The rally came even as retail sales fell 1.9 per cent in September, according to a preliminary estimate from Statistics Canada, amid supply-chain issues and a shift in consumer spending from goods to services.

Consumer stocks make up a small percentage of the TSX, which is heavily weighted toward financial firms, materials stocks and oil and gas companies. All three of these sectors are beneficiaries of accelerating economic growth, rapid inflation and the global energy crisis. Together, they make up about 57 per cent of the Canadian benchmark compared to just 17 per cent for the S&P 500. 

“The reflationary environment of healthy growth, accelerating inflation, rising bond yields, and higher commodity prices bodes well for the earnings of cyclical-value oriented sectors that dominate the S&P/TSX,” said Candice Bangsund, vice president and portfolio manager at Montreal-based Fiera Capital Corp. “It has rarely been this cheap versus its global peers, with ample room for Canadian stocks to outperform.”

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“Canada’s big three sectors have little quarrel with inflation - energy and materials naturally fare well when commodities are in favour, while financials are benefitting from a steeper yield curve and the solid credit gains that underpin the inflation pressure,” said Bank of Montreal’s Chief Economist Douglas Porter in a note.

Foreign investors have also been flooding Canada’s stock market this year. The nation’s equities are on pace to record the highest net inflow from overseas investors since 2017, adding more than US$22 billion as of the end of August, according to Bloomberg calculations based on Statistics Canada data. The TSX is traditionally a destination for investors looking for a higher risk-reward ratio, with energy and mining stocks making up about a quarter of the index. 

A rising Canadian dollar has also helped encourage capital flows from foreign investors. The loonie is the top-performing currency against the U.S. dollar among its G-10 peers this year, rising almost 2.9 per cent, partly because of higher prices for oil, lumber and other commodities the nation produces.

In another potential boost, banks, which make up a fifth of the benchmark, are awaiting the go-ahead from the nation’s Office of the Superintendent of Financial Institution to boost dividends after socking away record amounts of capital during the pandemic.

 “As long as the banks get some good news and commodities keep going, the TSX should be much higher at the year end,” said Greg Taylor, chief investment officer at Purpose Investments.