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Is the TSX Composite Due for a Correction?

Jacob Donnelly
Stock Market Charts

If you had been investing alongside the S&P/TSX Composite Index (TSX:^OSTPX) for the past year, you?d be sitting on a return of about 15.5%, which is a great year. However, the past quarter has been less than thrilling with the stock only gaining 0.8%; put another way, it?s basically in a holding pattern.

Naturally, investors are asking whether or not the TSX Composite is set for a correction. If we look at how the index did over two years, it?s only up 4.12%, and that?s because the overall composite took a huge hit from April 2015 to January 2016. For comparison, the composite was right around where it is today when shares began to fall over eight months.

So, what?s going to happen?

A lot of that depends on the major categories found within the composite. For example, 35% of the index is in financials, 21% is in energy, and 12% is in materials. In total, banks, oil and gas, and mining account for 68% of the total index. Therefore, the real analysis of the health of the index comes down to analyzing these specific sectors and how they?re going to behave over the coming months and years.

If we look at financials, we can see the banks have been doing very well. With interest rates increasing in the United States, banks with U.S. exposure could see their margins increase significantly. However, with speculation that the housing market here in Canada could start to dry up, banks without that diversification could experience some trouble, which could tighten margins.

Looking at energy, the past few years have been pretty painful for this sector. However, oil prices have stabilized with Brent Crude trading at a little over US$50 a barrel. The problem here is that this market could react harshly if OPEC starts to increase its production. The cartel has been working on reducing supply to ensure prices stay high; however, if member countries start to rebel, Canadian producers will suffer.

And finally, there?s the materials sector. One big opportunity here is, again, the United States. President Trump has talked often about a big investment in infrastructure; if this happens, commodity prices should increase. And there?s no denying that there is a dire need for infrastructure investment around the world, so at some point, I expect materials to increase even more.

Nevertheless, a big part of investing in the index is based on how these particular sectors are going to behave. Should you be buying or selling?

I?m not a market timer. I believe the market is expensive, but the market has been expensive before, and prices have increased by quite a bit. I also believe that over the long term a strong portfolio of stocks will beat out most other investments. However, I am an advocate of picking individual stocks rather than trusting the average of an entire index. There are specific banks, energy companies, and miners that are worth owning over others. Why subject yourself to the law of averages?

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

Six "pro" strategies for today's highly uncertain market

Motley Fool Canada's $250,000-real-money-portfolio service, Motley Fool Pro, is currently closed to new members. But lead advisor Jim Gillies is doing something special for investors who are worried about the market and where it will head in 2017.

He's revealing the six strategies he uses in Pro to help members guardrail their portfolios and make money in up, down, and sideways markets.

For a limited time you can download this "Pro 2017 Survival Guide" free of charge by simply clicking here.

 

Fool contributor Jacob Donnelly has no position in any stocks mentioned.