“Hey there Toronto Stock Exchange, can you step into my office for a quick second? Close the door behind you. We’ve been looking at your work over the last year and quite frankly, it stinks.”
At this point in the performance review, the lowly stock exchange looks at its shoes and mutters something about how its price-to-earnings ratios look okay.
The fact that the TSX is cheaply priced, by some measures, is about the only redeeming quality emerging from a plethora of Canadian economic and financial shortcomings.
From GDP growth to productivity to employment to housing to financial markets and more, the data point to Canada lagging well behind the United States by nearly every conceivable economic and financial measure.
“When it comes to the real economy, it seems anything we Canadians can do, Americans can do better,” Warren Lovely, chief rates and public-sector strategist with National Bank of Canada, wrote in a report this week.
The gap in stock market performance has widened steadily over the last year, during which the S&P/TSX Composite Index is little better than flat, while the S&P 500 index has gained 21 per cent.
Now, although it’s Canada’s self-imposed fate to be forever measured up against the U.S., this may strike some readers as an unfair comparison for the moment.
The U.S. is a bastion of economic strength at a time when much of the West is stagnant at best. The American economy grew at a brisk annualized pace of 3.3 per cent in the fourth quarter, while Canada’s GDP growth is likely to come in closer to 1 per cent. The eurozone grew by just 0.1 per cent, narrowly avoiding a technical recession.
But unlike the TSX, most of the world’s other major stock markets have managed to rise above their own economic impediments. French and German stock benchmarks both ended the week at record highs, spurred by encouraging corporate results, fading inflation and the prospect for rate cuts. The Nikkei 225 is up by 40 per cent over the last 12 months, despite the Japanese economy slipping into a recession as of the fourth quarter.
In fact, you could argue that a global bull market is afoot – one that has mostly left Canada behind.
How could this be? Why is the TSX so hated? Let us count the ways.
Start with the economy. Three main points here, beginning with labour productivity, the country’s dismal record on which goes back decades. But over the last five years it has actually declined, which BMO chief economist Doug Porter recently pointed out, is a first in the postwar era.
To an economist, there is little that matters more than productivity, as it is the basis of a country’s standard of living. It is the reason we are not still dwelling in caves.
But this perennial Canadian weakness is especially unhelpful in an era of high inflation. That’s because wage growth is hot right now, as workers try to claw back some of the buying power they’ve lost. In the absence of productivity gains, those wage pressures bear fully on a business’s costs – and to the extent that they can pass that burden onto consumers, they will. It’s a fine recipe for sticky inflation.
Second, these economic times simply do not play to Canada’s strengths. Ours is an economy that is at its best when interest rates are low, global manufacturing is humming and resource demand is strong.
“Countries that are more sensitive to rates and global trade are doing worse; those less exposed are doing better,” Craig Basinger, chief market strategist at Purpose Investments, wrote this week.
It’s no secret which camp Canada falls in. The country is heavily reliant on resource exports, and our mortgage market is much more skewed to variable rates than in the U.S., which is dominated by 30-year fixed mortgages.
Which brings us to point number three. There should be a silver lining to Canada’s poor economic standing. You would expect slower growth to at least translate to lower inflation. It’s only fair.
But that’s not happening either. In December, both Canadian and U.S. consumer price indexes rose by 3.4 per cent annualized.
“The failure to secure marginal inflation relief links to one area where Canada is vastly outgrowing the U.S.: population!” Mr. Lovely said. Shelter costs are responsible for more than half of Canadian inflation, which maybe shouldn’t come as a surprise given how many newcomers are looking for homes, he added.
Let’s add all this up. We have a sluggish, unproductive economy that is rooted in resource exports, highly sensitive to interest rates and laden by excess inflation driven by the soaring costs of housing. Is it any wonder the TSX is vastly underperforming? With 60 per cent of its market capitalization tilted toward financials and resources, it is fraught with the same frailties as the economy.
It’s probably best to lower our expectations for the TSX.
After all, it starts work on time every day, puts in its hours and grinds along the best it can. Under the circumstances, that may be the best we can hope for.