Why the Canadian stock market is performing so poorly compared to the U.S. market

The week's gut wrenching volatility on stock markets tell us two important things. First, that over a year or more, most stocks are still performing incredibly well. Second, that Canada's stock market looks awful when compared to U.S. benchmarks likethe Dow Jones or the S&P 500.

Aroundthis time last year, the Dow Jones Industrial Average had just sailed past the 20,000mark for the first time. Today, even after the plunge on Monday, the Dow is up a respectable 19per centover the past 12 months. Same goes for the S&P 500; factor in Monday's sell-off and the index is still sitting on a nearly 12.5 per centgain.

So, investors may have given some gains back on Monday, but they've seena solid year of returns. At least that's the case for stocks traded on U.S.markets. Canada's TSX tells a very different story. Over 12 months, the TSXhas fallen3.1per cent.

Look at a two-year chart tracking the Dow, the S&P 500 and the TSX.If you're on a mobile device and it's too tiny all you need to know is the TSX is lagging. Badly.

All three indexes stay pretty closely entangled, rising and falling together right up to 2017. By the end of January, the Dow and the S&P start their long climb. The TSXforges off on its own. On that two-year timeline, the Dow and the S&P are up 49 per centand 43per cent,respectively. The laggard TSXjust 22 per cent.

Use this handy interactive chart from Yahoo Finance. Look at thefive-year chart,it's the same story. Scroll out to see how the three indexes have done since the financial crisis in 2008. The TSXjust isn't keeping up.

The Trump effect

The date where those three indexes split is no coincidence. The U.S. markets began to climb after Donald Trump was sworn in as president. His promises of tax cuts, deregulation and infrastructure fuelled the market rally.

"As soon as Trump was in office, (stock markets)knew he was going to spend," said Conor Bill, managing director of Mt. Auburn Capital. "His plans for tax cuts were like catnip for the markets. They reacted. Theycontinue to react very strongly."

Bill saidCanada's stock market index didn't get any such bump. But more importantly, he saidthe TSXis lagging mainlybecause it's composed largely of resource heavy stocks that aren't exactly booming right now.

"The tech weighting is incredibly small in the TSX," he told CBC News. "Whereas it'smuch larger in the Dow and the S&P., and tech has been far and away the best-performing sector internationally."

Karl Schamottafrom Cambridge Global Payments agreed.

"Canada remains a laggard in new-economy activity (the country spends more on real estate commissions and transfer costs than on R&D)," he said in an email.

He saidlow oil prices, combined with ongoing pipeline delaysand a strong dollar mean Canadian oil is trading at an even largerdiscount than usual.

International investors sour on Canada

But Schamotta saidthere's a deeper problem that the lagging TSX highlights:that international investors don't see as much opportunity in Canada right now.

"Global markets are increasingly aware that Canadian households are severely indebted meaning that the consumption growth that has long powered the economy is unlikely to be sustained."

And therein lies the bigger issue. It's one thing if the country's stock market index isn't performing well. You can change the stocks held in that basket or give them a different weighting.

Schamottasaidthe issue here is that the TSX is actually pretty reflective of oureconomy and the lagging performance is yet more proof that weneedto diversify.

"We as an economy need to become more competitive," he said.

Canada ranks second last (ahead of only Italy) in the G7 for research and development as a percentage of GDP. For too long we've been a consumer-led economy. If we don't address that, it's not just the stock market that will fade. It's the broader Canadian economy.