In any rational sense, the S&P/TSX Composite Index breaching 30,000 briefly this past week for the first time is meaningless, notable only for our fascination with big, round numbers.
And yet, TSX 30,000 is a triumph worth celebrating. It is the culmination of a stock market revival as COVID-19 has faded that has seen Canadian equities trounce global benchmarks while nearly keeping pace with the super-heated U.S. market.
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Over the past five years, the TSX has gained 87 per cent, which translates to a very solid 13.3-per-cent average return per year. That’s a tad shy of the S&P 500 Index, at 15 per cent. But well ahead of the 8.8 per cent average return posted by non-U.S. stocks.
In a year marked by economic humiliation, every indication that the country’s prospects remain alive ought to be appreciated.
The resiliency of Canadian companies is one of them.
After several years in the wilderness, the Canadian stock market has once again become a fine place to build wealth.
Some people insist it always was.
A decent stock picker has always had a deep roster of world-class companies to mine for value. Some of the most profitable banks in the world. Resources up the wazoo. Dividends, gold. The rails blessing anyone wise enough to hold a stake in them indefinitely – the past year or two notwithstanding.
But there’s no denying there were some lean years for the TSX. The entire 2010s, really.
After the commodity boom of the 2000s fizzled out, Canadian stocks were seen as too old-economy for an era dominated by high-tech and high-growth companies.
Plus, an inability and/or unwillingness to play to the country’s strengths in the resource industries turned off foreign investors. Many of them came to see Canada as an uninvestible backwater.
But look at what has carried the TSX over the past five years. The big three sectors – financials, energy and materials – have generated average returns of 15 to 20 per cent a year.
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“On an entire market cycle, I’ll take Canada any day,” said Rebecca Teltscher, a portfolio manager at Newhaven Asset Management Inc. in Toronto.
“Canada focuses more on hard assets. On infrastructure with long-term projects. On dividends over stock buybacks.”
When U.S. President Donald Trump set Canada’s blood aboil upon returning to office in January, some Canadian investors toyed with the idea of boycotting the U.S. stock market.
Disregard the biggest, fastest growing companies in the world? Do so at your peril, they were told. And then the TSX outperformed the S&P 500 by a sizeable eight percentage points year-to-date.
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Three-quarters of one year doesn’t prove much, beyond it being a bit of a moral victory for Canadians. But the forces that have propelled domestic equities this year have not weakened.
“The bull case has arrived,” Brian Belski, chief investment strategist at BMO Capital Markets, said in a note. “The stock market recovery that no one believed … has reached heights that even we thought were lofty.”
Two durable lessons about the stock market shine through in all of this.
First, the stock market is not the economy. The TSX can thrive even as the real economy fades. Canadian stocks have realized earnings growth and improved operating performance as gross domestic product growth and unemployment have worsened.
“This fact has never been more prevalent in our view than the past two years in Canada,” Mr. Belski wrote.
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Second, valuations matter. Canadian stocks were so out of favour and heavily discounted, a mere normalizing of valuations closer to long-term averages helped catapult the index to where it is today.
Now, the Canadian stock market seems to be getting a wholesale rethink.
“The resource sectors are coming back into focus and the international community of investors is probably paying more attention to Canada than they have in a long time,” said Ryan Crowther, a portfolio manager at ClearBridge Investments, part of Franklin Templeton.
No one is saying investors have to choose Canada over the United States. In fact, the two markets complement each other quite nicely. Together, you get growth plus value. Tech plus resources. Dividends plus buybacks.
It’s the idea that the Canadian stock market is inherently inferior that now seems outdated.
Just maybe this is no longer the place where portfolios go to die.