06/09/2016 03:06 EDT | Updated 06/09/2016 03:59 EDT

Canada's Stock Market Is Beating The Rest Of The World By A Mile

But it still hasn't returned to previous highs.

Mark Blinch / Reuters
A sign board displaying Toronto Stock Exchange (TSX) stock information is seen in Toronto June 23, 2014. Canada's main stock index was little changed on Monday as weakness in financial and energy shares offset gains in the materials sector. REUTERS/Mark Blinch (CANADA - Tags: BUSINESS)

Just a year ago, analysts were declaring a “lost decade” for Canadian stocks. Prices had fallen so far since their peak in 2013/2014 that they had wiped out 10 years’ worth of gains.

But that was then. Fast forward to mid-2016, and Canadian stocks are outperforming every major stock index tracked by Bloomberg Markets.

The S&P TSX Composite, which measures the value of the Toronto Stock Exchange, is up 9.6 per cent since the start of the year. That’s more than twice as fast as the next-fastest market — New York.

Why the sudden turnaround? It has everything to do with the bounce-back in commodity prices in general, and oil prices in particular.

Toronto’s commodity-heavy stock market underperformed for years while New York’s tech stocks soared through the stratosphere. But with tech earnings under pressure and the price of oil bouncing back (partly) to 10-month highs around the US$50 mark, these markets are seeing a reversal of fortune.

But here's the rub: Look at the long-term performance of the TSX, and it's still trading sideways. It was trading at around 14,226.16 as of Thursday afternoon — well below its peak above 15,500 in 2014.

The S&P TSX Composite Index over the past five years. (Chart: TMX)

Will the rally last?

Many analysts are growing convinced the recent commodities rally is the genuine article. They note it’s not just one or two items like oil that are soaring — everything from gold to sugar and soybeans is up this year, and that bodes well for commodity economies like Canada’s.

(In fact it might make sense to buy commodities themselves rather than shares of companies that rely on them. Commodity prices are outperforming stock and bond prices this year.)

But not everyone is convinced the rally will last. Commodity prices largely depend on demand in the parts of the world where manufacturing takes place — namely China, these days, and China’s economy is struggling.

“There is no fundamental long-lasting recovery in the commodity space without global demand growth shifting course and accelerating, and that’s just not in the cards in the foreseeable future,” David Rosenberg, chief economist Gluskin Sheff in Toronto, said earlier this week.

He describes the rally as a “dead cat bounce” — meaning stock prices fell so fast that they rebounded when they hit bottom, but won’t be rising permanently anytime soon.

So the same sage advice applies today as it ever did: Keep a diversified investment portfolio.

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