For the Canadian stock market 2015 was a miserable year. Measured in U.S. dollars, the market lost 25%, only beaten for the last spot among the major markets by the 42% drop of Brazil’s market. By comparison, the S&P 500 ended the year slightly lower, while Japan had the best performance with a 9% gain.

The reasons for this poor performance are obvious. The Canadian market has a high proportion of mining, commodity and energy stocks in the main indices. These stocks dragged the overall index down with large companies such as Tech Resources and Encana both losing more than 50% of their market value.

The Chinese Year of the Sheep is best forgotten, and the key question is what 2016, the Year of the Monkey, will deliver.

Odds in Our Favor

Statistically speaking, the prospects are bright. Now, I know if you torture the data long enough it will confess to anything, but the chances of a repeat annual performance is statistically a low-probability event. Over the past 30 years, the Canadian market dropped by more than 20% in U.S. dollars over rolling 12-month periods only a few times. Almost without exception, the market recovered well from these deeply oversold positions a year later.

Also, the Canadian market has now performed worse than the U.S. market for five consecutive years, which is the longest stretch of relative underperformance for at least the past 30 years. And the cumulative level of underperformance is the worst it’s ever been over that period.

When graphed (see below), the rolling 48-month performance of the Canadian stock market, as measured in U.S. dollars, seems to have hit rock bottom versus the S&P 500. So it’s likely that better days are ahead for the Canadian market.

What Key Sectors Tell Us

Of course, markets don’t perform well without sound fundamental support or at least the expectation of that support.

A key driver for Canadian stocks is the price of commodities, including energy. Last month we pointed out that commodity prices will remain lower for longer. Nevertheless, markets are forward-looking, and investors may start discounting better prospects for the commodity companies later this year.

The other key sector of the Canadian equity index, financials, has three subcomponents: banks, insurance and real estate. Moderate growth is expected for all three in 2016, with somewhat better prospects for 2017 as interest rates start to rise and economic growth accelerates.

Other important sectors in the Canadian market include industrials, telecommunications, consumer cyclicals and non-cyclicals, and utilities. Profits in these sectors are driven higher in a number of ways. The weak Canadian dollar, an improving U.S. economy and low interest rates may prompt exports and domestic consumption to increase.

Consensus estimates indicate that profits for large Canadian companies, those in the TSX 300 index, will grow 7% in 2016 and 9% in 2017. Dividends are expected to grow at roughly the same rate. And profits will be driven higher still for 2017 if commodity prices start to recover.

For the overall market, valuations indicate a forward price-to-earnings ratio of 15 times for 2016 and 14 times for 2017. That’s considerably cheaper than the U.S market and most other major global markets. Together, all these indicators imply that 2016, the Year of the Monkey, holds promise for the Canadian market.