“Hey, Toronto Stock Exchange, could you come to my office for a moment? Close the door behind you. We’ve looked at your work over the last year and honestly, it stinks.”
At this point in the performance review, the losing stock exchange takes one look at its situation and mutters something about how its price-to-earnings ratio is fine.
The fact that the TSX is somewhat cheaply valued is about the only redeeming feature that comes from the plethora of Canadian economic and financial shortcomings.
From GDP growth to productivity to employment to housing to financial markets and more, the data suggests that Canada is significantly lagging behind the United States on almost every economic and financial measure imaginable.
“When it comes to the real economy, Americans seem to do better at everything we Canadians can do,” Warren Lovely, chief interest rate and public sector strategist at the National Bank of Canada, wrote in a report this week.
The gap in stock market performance has steadily widened over the past year, with the S&P/TSX Composite Index barely better than flat while the S&P 500 Index gained 21 percent.
Now, while it is Canada's self-imposed destiny to compete with the United States forever, this may seem like an unfair comparison to some readers at the moment.
The United States is a bastion of economic strength at a time when much of the West is stagnant at best. The American economy grew at a strong annual pace of 3.3 percent in the fourth quarter, while Canada's GDP growth is expected to be closer to 1 percent. The Eurozone grew by just 0.1 percent, narrowly avoiding a technical recession.
But unlike the TSX, most of the world's other major stock markets have managed to overcome their own economic obstacles. Both French and German equity benchmarks ended the week at record highs, driven by encouraging corporate results, easing inflation and the prospect of interest rate cuts. The Nikkei 225 has risen 40 percent in the past 12 months even as the Japanese economy slipped into recession starting in the fourth quarter.
In fact, one could argue that a global bull market is underway – one that has largely left Canada behind.
How could that be? Why is the TSX so hated? Let's count the ways.
Start with the economy. Three main points here, starting with labor productivity, whose dismal record for the country goes back decades. But over the past five years it has actually declined, something BMO chief economist Doug Porter recently pointed out is a first in the postwar era.
For an economist, there is hardly anything more important than productivity, as it is the basis for a country's standard of living. That's why we don't live in caves anymore.
But this continued weakness in Canada is particularly unhelpful at a time of high inflation. That's because wages are currently rising sharply as workers try to regain some of their lost purchasing power. Without productivity improvements, this wage pressure will fully impact a company's costs – and to the extent that they can pass this burden on to consumers, they will. It's a good recipe for stubborn inflation.
Second, Canada's strengths are simply not being leveraged in these economic times. Our economy performs best when interest rates are low, global production is booming and demand for resources is high.
“Countries that are more sensitive to interest rates and global trade fare worse; The less exposed are doing better,” Craig Basinger, chief market strategist at Purpose Investments, wrote this week.
It's no secret which camp Canada falls into. The country relies heavily on commodity exports, and our mortgage market is much more variable-rate-oriented than in the U.S., which is dominated by 30-year fixed-rate mortgages.
That brings us to point number three. Canada's poor economic situation may have a positive ray of hope. One would expect that slower growth would at least lead to lower inflation. It's only fair.
But that doesn't happen either. In December, both the Canadian and U.S. consumer price indexes rose 3.4 percent on an annual basis.
“The failure to provide modest relief from inflation is tied to an area where Canada far exceeds the U.S.: population!” said Mr. Lovely. Housing costs account for more than half of Canada's inflation, which is perhaps no surprise given how many newcomers are looking for a home, he added.
Let's put it all together. We have a sluggish, unproductive economy based on commodity exports, highly sensitive to interest rates, and burdened by excessive inflation caused by rising housing costs. Is it any wonder that the TSX is significantly underperforming? With 60 percent of its market capitalization coming from finance and resources, it suffers from the same weaknesses 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 the hours and works as best as it can. Given the circumstances, perhaps that is the best we can hope for.
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