Canadian stocks have had a decent run since the 2008 global financial crisis The S&P / TSX Composite Index has returned an annual gain of 10.1 percent since December 31, 2008, until the end of last year.
However, this is pale compared to the performance of the S&P 500 index, which grew at an annual rate of 16.1 percent. If you had invested $ 1 million in TSX at the end of 2008, your investment would have been worth $ 3,477,264 by the end of 2021. By comparison, the same investment in the S&P 500 index would be worth, 6,873,269, more than a staggering 30 3,3056 Canadian investment.
The structure of the Canadian stock market is dramatically different from that of its southern neighbor. As the table below illustrates, Canadian stocks are much more concentrated in financial, energy and materials companies, whereas the U.S. market is more concentrated in the technology, healthcare and consumer consideration sectors.
In 1980, country singer Johnny Lee’s song “Looking for Love” was released Urban Cowboy The iconic lyric of the soundtrack, “Looking for love in all the wrong places,” serves as an apt description of the low performance of the S&P 500 vs. TSX. When stocks of finance, energy, and materials surpass their counterparts in information technology, healthcare, and the consumer consideration sector, it is highly likely that the TSX will outperform the S&P 500 and vice versa.
In the two years ending December 31, 2021, the information technology sector was a star performer in both Canada and the United States. Due to the heavier weight of the tech companies in the S&P 500, their outstanding performance had a much greater impact on the S&P 500’s returns than the TSX. Conversely, lower performance of financial, energy, and materials stocks has outperformed Canadians compared to US stocks.
The following table clearly indicates that the growth of GDP worldwide is a significant determinant of the relative performance of Canadian and US stocks. Strong global GDP growth is generally matched by TSX outperformance, while weak global GDP growth often leads to lower performance. In years when global growth was below 3.5 percent, Canadian stocks were relatively bad; When growth was above 3.5 percent, the TSX surpassed the S&P 500. Importantly, when growth exceeds four percent, adversity favors Canadians more than U.S. stocks.
Another key determinant of the competition between the TSX and the S&P 500 is oil, which is not surprising given that about 13.1 per cent of the TSX power companies contribute to the S&P 500, compared to about three per cent. As shown in the table below, TSX has performed in more than two-thirds of the year, during which oil prices rose more than 10 percent and in 80 percent, oil prices rose more than 30 percent. Even before Russia’s invasion of Ukraine, oil prices were expected to rise sharply, possibly for the foreseeable future.
The underperformance of the TSX vs. S&P 500 has been historically extreme over the last few years. As indicated by the chart below, Canadian stocks have suffered one of their worst 10-year lows since 2000.
Returning to the trend has been one of the most defining features of the market since time immemorial. Any asset class that has performed dramatically well over the years may perform poorly over the next several years and vice versa. This suggests that the TSX may surpass the S&P 500 in the next few years. While the historical monuments may fail to repeat themselves, it is dangerous to ignore the past, and the tomb of investment is overwhelmed with new paradigms. Quoting investment pioneer Sir John Templeton, “the four most expensive words in the English language are ‘this time it’s different.’
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This notion that US equities are much broader than their Canadian counterparts is also supported by the relative valuation of the TSX and S&P 500. The following graph shows that Canadian equities are currently trading at their biggest discount to their US counterparts since 1994. While relative assessments are not conducive to predicting relative performance in the short term, they have been historically effective in doing so in the medium to long term. The last time the TSX Composite Index traded on the S&P 500 for an extended period was during the technical bubble of the late 1990s, after which Canadian stocks performed 28.9 percent and 83.7 percent higher over the next five years.
Mark Twain noted that “history does not repeat itself, but it often rhymes.” From this perspective, volatile oil prices, attractive relative valuations, and extreme low performance over the past several years all serve as a strong supporter of Canadian stock market outperformance.
– Noah Solomon is the chief investment officer at Outcome Metric Asset Management LP.
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