NAFTA and Markets: US Economic Impacts on Canadian Equities

Jan 14, 2010

The Canadian and US economies are highly integrated.  The US is Canada’s largest trading partner and the health and strength of the US economy has important ramifications for the Canadian economy and markets.  In this Research Bulletin, we use the Barra Canadian Equity Model (CNE4) to explore the relationship between the US economy and Canadian markets.  We find a statistically significant relationship between new orders in the US manufacturing sector and equity returns from the Canadian energy sector, the sector most heavily impacted by US-Canadian trade. We also show that this relationship has increased over time due to the North American Free Trade Agreement (NAFTA).