The Canadian equity markets (all are measured in U.S. dollars in this article), performed well compared to the U.S. and global equity markets in the first two months of 2016. Where the S&P 500 and the MSCI World Equity indexes both lost more than 5% so far this year, the Toronto Stock Exchange 300 Composite Index gained 1%, and the Canadian Edge Dividend Champions Portfolio 4%. Part of this relatively strong Canadian performance was the result of a stronger Canadian dollar relative to the U.S. dollar.

But on closer inspection of the Toronto index, it turns out that eight of the top 10 performing stocks over the first two months were gold and silver producers that followed the gold price upwards. Two gold heavyweights, Barrick Gold and Kinross Gold,  had spectacular gains of 84% and 58%, respectively. At the bottom of the pile was an eclectic bunch including some energy stocks (Baytex Energy and MEG Energy), Valeant Pharmaceuticals and Air Canada.

With market volatility elevated, it’s impossible to draw any conclusions about whether we have reached the turning point of the Canadian stock market’s performance versus the U.S. market.

Nevertheless, we stick to our view that 2016 could be a relatively good year for Canadian stocks based on several reasons. First, markets move in cycles. A comparison of the Canadian and U.S. stock markets since 1985 indicates that an underperformance of the magnitude seen over the past few years eventually ends and is followed by a period of outperformance, with the Canadian market doing much better than the U.S. market.

Second, keen observers will also note that the relative performance of the Canadian equity market pretty much reflects the commodity price cycles. In the December 2015 issue of Canadian Edge, we explained why we believed commodity prices would remain lower for longer. Still, markets are inherently forward-looking, and it may well be that investors start discounting better prospects for commodity companies later this year.

Finally, overall valuations for Canadian stocks indicate a forward price-to-earnings ratio of 14 times for 2016 and 13 times for 2017.

This is considerably cheaper than the U.S. market and most other major global markets.

But for the purposes of the Dividend Champions Portfolio, we are (except for bragging rights) not overly concerned whether the overall Canadian market beats other markets.

Although it is helpful and much more enjoyable to have a rising market, we are mainly interested in selecting companies that are able to sustain and grow their dividends.

Gold companies and many other commodity producers don’t easily qualify for the portfolio simply because commodity cycles wreak havoc with the profitability of these companies, making it difficult for them to sustain and grow dividends consistently over time.

Those that do qualify are only the best-quality, lowest-cost producers, with strong balance sheets and a history of paying dividends even during down cycles.

Only time will tell whether we have seen the turning point for the Canadian equity market, but we are comfortable making the case that U.S.-based investors should hold a portion of their equity portfolio in high-quality Canadian Dividend Champions.