As Fed Chair Jerome Powell hiked interest rates by 25 basis points, in line with broad-based market expectations and bullish economic sentiments, leading benchmark indices across the domestic market closed lower with investors bracing for more hikes in 2018. While the Dow Jones industrial average closed 44.96 points lower at 24,682.31, the S&P 500 slipped 0.2% to 2,711.93 and Nasdaq composite fell 0.3% to 7,345.29. The Canadian economy being closely integrated with its U.S. counterpart was largely anticipated to follow the suit. However, the Toronto Stock Exchange's S&P/TSX composite index, the leading index of the country, closed 58.92 points higher or 0.4% at 15,675.28 as energy stocks rallied on higher oil prices .
Let us dig a little deep as to how the Fed rate hike will impact the Canadian market.
The Canadian Economy
In 2017, Canada's GDP was $1.76 trillion - less than one-tenth of the U.S. GDP of $19.3 trillion. Notably, about 90% of its total population lives within 100 miles of the U.S. border as the northern half remains out of bounds for much of the year due to intensely frozen climate. Much of the Canadian economy depends on the United States as it accounts for nearly three-fourth of its total exports. Moreover, Canada does not share any physical boundaries with any other country other than the United States, which makes shipping of goods to other markets highly expensive.
The country remains overtly reliant on oil exports as it owns the third largest oil reserves in the world at 173.1 billion barrels. Consequently, the country piled on huge debt as global oil prices plummeted from $100 to $25 a barrel in 2014. Although the central bank cut interest rates to stimulate the economy, the debt-to-GDP ratio remains significantly high at 92%.
Cascading Effect of Fed Rate Hike
The Bank of Canada devises its own economic policy separate from the U.S. Fed. However, historically the Canadian rates seldom stray far from those of its neighbor. The country remains exposed to 'imported inflation' as an improved outlook for higher wages and rising commodity prices in the United States will lead to higher raw material prices for Canadian products. This could eventually lead to higher retail prices and burden the exchequer.
Moreover, higher interest rates will attract more investors from Canada to its neighboring country, pushing the loonie down and thereby leading to higher inflation rate in the domestic market as imported foreign goods become dearer. The cascading effect could further spill over to the bond markets and Canadian financial firms could find it difficult to attract more foreign investments. If the central bank of the country finally hit the raise button for interest rates, Canadian borrowers might find it hard to adjust after decades of decline.
4 Top Canadian Picks to Bet on
Amid challenging macroeconomic conditions, investors could benefit if they consider investing in some top Canadian stocks that are backed by a solid Zacks Rank and healthy fundamentals.
CGI Group Inc.GIB : Headquartered in Montreal, CGI Group offers a plethora of information technology and business process services. These include portfolio management, quality assurance and testing, modernization, and migration services; agile, business transformation, cybersecurity, data analytics, digital enterprise, project management, and industry-specific business consulting services. This Zacks Rank #2 (Buy) stock has long-term earnings growth expectation of 9% and a VGM Score of B.
Canadian Imperial Bank of CommerceCM : Headquartered in Toronto, Canadian Imperial Bank of Commerce offers a full range of products and services through its comprehensive electronic banking network, branches and offices across Canada, in the United States and globally. This Zacks Rank #1 (Strong Buy) has long-term earnings growth expectation of 5.8%. You can see the complete list of today's Zacks #1 Rank stocks here . The stock surpassed estimates in the trailing four quarters, recording a positive average earnings surprise of 6.9%.
The Toronto-Dominion BankTD : Headquartered in Toronto, The Toronto-Dominion Bank offers various personal and commercial banking products and services in Canada and the United States. These include savings and investment products; financing, investment, cash management, international trade, and day-to-day banking services to small, medium, and large businesses; property and casualty insurance, as well as life and health insurance products. This Zacks Rank #2 stock has long-term earnings growth expectation of 10.5% and a positive average earnings surprise of 4.4% in the trailing four quarters, beating estimates thrice.
Just Energy Group Inc.JE : Based in Mississauga, Just Energy Group offers electricity, natural gas, and renewable energy solutions in the United States, Canada, the U.K., Ireland, Germany, and Japan. This Zacks Rank #2 stock has a VGM Score of A. The stock has a positive average earnings surprise of 173.1% in the trailing four quarters, beating estimates twice.
As the equity markets appear quite shaky driven by a cross-border economic impact, a sneak peek at some outperformers backed by a solid Zacks Rank and healthy fundamentals could be a great idea for investors. These stocks seem to hold great promise for the future and are likely to reward shareholders generously.
Zacks Editor-in-Chief Goes "All In" on This Stock
Full disclosure, Kevin Matras now has more of his own money in one particular stock than in any other. He believes in its short-term profit potential and also in its prospects to more than double by 2019. Today he reveals and explains his surprising move in a new Special Report.
Download it free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportJust Energy Group, Inc. (JE): Free Stock Analysis ReportToronto Dominion Bank (The) (TD): Free Stock Analysis ReportCanadian Imperial Bank of Commerce (CM): Free Stock Analysis ReportCGI Group, Inc. (GIB): Free Stock Analysis ReportTo read this article on Zacks.com click here.