For the Canadian market, 2016 turned out as well as we could have hoped. In U.S. dollar terms, Canada’s benchmark S&P/TSX Composite Index generated a total return of 24.5%, making it the best performer among the developed world’s equity markets and more than doubling the S&P 500’s return.

Canadian Edge had an even better year. Our Dividend Champions Portfolio generated a total return of 26.5% in U.S. dollar terms, while our top 5 holdings returned an average of 61% for the year.

Now, the question is what investors can expect from 2017, the Chinese Year of the Rooster.

From a statistical perspective, the extraordinarily long five-year stretch of the Canadian market’s relative underperformance versus the U.S. market ended in 2016. However, these cycles normally last much longer than 12 months and, as indicated by the graph accompanying this article, could yet continue for years.

Of course, markets do not perform well without sound fundamental support, or at least the expectation of an improvement in fundamentals.

One of the biggest factors behind the Canadian market’s outperformance was the rebound in the resource space. The country’s stock market has significant exposure to mining, energy and other commodity-related stocks.

Indeed, energy and materials are the second- and third-largest sectors in the S&P/TSX, accounting for about one-third of the market’s total capitalization. By contrast, these same sectors only comprise about 10% of the U.S. market.

As the energy sector’s recovery gained steam last year, share prices raced ahead of fundamentals, with some stocks rising by triple digits, albeit off of long-term lows. We would expect these stocks to take a breather, as profits catch up with share prices.

Canada’s single biggest sector by far is financials (nearly 35% of the market), and these stocks joined the party later in the year as rising bond yields improved earnings prospects for banks and insurance companies. Financials should enjoy moderate growth this year as interest rates start to move higher and economic growth accelerates.

Other important sectors in the Canadian market include industrials, telecommunications, consumer cyclicals and non-cyclicals, and utilities. These sectors have a variety of profit drivers, but it’s conceivable that the ongoing weakness of the Canadian dollar and improving economic activity in the U.S. will continue to support export activity, tourism, and domestic consumption.

Analysts forecast earnings per share for the Canadian market as a whole will grow by 21.4% in 2017, with the average dividend expected to grow by 3.8%. And there’s potential for actual results to exceed these projections as higher product prices drive commodity producers’ profits.

On a forward price-to-earnings basis, the Canadian market trades at a valuation of 16.9 times, which is moderately cheaper than the U.S. market, which trades at a forward valuation of 17.5 times.

Of course, equity markets are never without risk, so below we consider three factors that could derail the Canadian economy and markets in 2017.

Will Commodity Prices Drop Again?

In addition to accounting for roughly one-third of Canada’s stock market, commodities contribute 12% to the country’s gross domestic product (GDP) and are about 50% of exports.

Oil, the single most important commodity, is expected, per a recent Reuters poll, to average $55 per barrel in 2017 and $60 per barrel in 2018, compared to an average price of $43 per barrel in 2016.

Although commodity prices in general staged a decent recovery last year, the Canadian commodity basket (in U.S. dollar terms) is still priced at less than 50% of its 2008 peak.

Given multi-year development lead times and the high cost of extraction for many commodities, the prices of oil and other key resources tend to move in long cycles.

Consequently, we think it’s unlikely that there will be another sharp drop in commodity prices this year. Instead, our best guess is that there will be a slow grind to a higher point compared to current levels. This should give a nice boost to the Canadian dollar as well as the stock market.

Canadian Housing Prices Drop

Housing prices in Canada have increased by 80% over the past 10 years, though this shrinks to 45% when adjusted for inflation. Nevertheless, this is a faster pace of growth than almost any major developed nation.

On a variety of measures, including price to income and price to rent, the Canadian housing market ranks among the most expensive in the world.

At a major city level, the situation is even more pronounced, with the best example being the doubling of home prices in Vancouver over the past 10 years, making it among the most expensive cities in the world.

Despite the warning signs, investors and speculators seem unperturbed, as evidenced by the 80% growth in residential mortgage lending over the past 10 years by Canadian financial institutions.

We’ve already seen home sales fall dramatically in Vancouver since the introduction of a 15% tax on foreign transactions, with average prices down 18% from last year’s peak.

Alberta’s housing market has also cooled following the energy sector’s crash. And higher mortgage rates, which are linked to government bond yields, may have the same effect on the Toronto and Vancouver markets this year.

Although the large Canadian banks are well diversified, with a variety of income streams along with conservative and well-protected loan books, all banks would be hurt by a sharp correction in the housing market.

The U.S. Decides to Renegotiate NAFTA

Canada and the U.S. share a 5,500-mile border that’s crossed by an average of 400,000 people and $2 billion worth of trade daily. The two countries have the world’s largest trading relationship, with $663 billion worth of goods and services exchanged in 2015. Canada is the second-largest trading partner for the U.S., while the U.S. is Canada’s largest trading partner.

Trade ties between the two countries have been further fostered by the Canada-U.S. Free Trade Agreement (1988) and NAFTA (1993), which allow most goods and services to cross the border without duties. Over the past 20 years, U.S. exports to Canada increased by 179%, while U.S. imports from Canada are up 165%.

Canada is the leading export destination for 35 U.S. states, while 22 states count Canada as their largest import trading partner. The U.S. Commerce Department estimates that export activity to Canada supports 1.7 million U.S. jobs, and presumably such trade exerts a similar influence on the Canadian job market.

President-elect Trump has been outspoken about renegotiating NAFTA. As such, uncertainty about the future of this agreement will create an overhang for companies with major export operations to the U.S., such as auto parts manufacturers and lumber companies, among others.

These are early days in what could be a new phase in the relationship between these two NAFTA partners, and we must wait and see how the Trump administration deals with this important trade relationship.

Regardless of how these events unfold, we remain focused, as always, on the sanctity of the dividend. While the value of our holdings will fluctuate with the markets, we expect our companies to sustain and grow their payouts over time.