Source: The Conversation, Spencer Colby / EPA
By Guest Blogger Doug Rowat
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It’s been a tough year for Canada.
Trump, of course, has been tormenting us, so much so that the media at one point asked him, in all seriousness, if he was planning to invade. We’ve been in the crosshairs of his global trade war for months. And our labour market is now showing serious signs of stress. Our unemployment rate has ratcheted up steadily for the past three months and now sits at 7%, the highest level since September 2021.
Not surprisingly, analysts have been warning regularly of a recession with TD chief economist Beata Caranci recently stating, quite ominously, that “the fear is real.”
Yet our equity market soars.
The first lesson is that the Canada-is-dead-in-the-water newsflow assailing us daily should never be equated with equity-market performance. The S&P/TSX Composite is not only up nearly 8% this year but has roughly quadrupled the performance of the S&P 500. How is this possible?
We’re the picked-on little brother destined to be beaten to a pulp are we not? Clearly, many of this country’s top blue-chip stocks didn’t get that memo. Y-t-d, as of this writing, Barrick Mining is up 30%, Toronto-Dominion Bank is up 28%, Cameco is up 26% and Loblaw is up 18%. Even the perpetually underperforming Telus has posted double-digit gains this year.
You might further expect that this country’s top money managers have prudently overweighted many of these individual stocks and are therefore achieving tremendous outperformance of the broader market. Wrong.
The second lesson is that active fund managers are remarkably ineffective. Y-t-d performance numbers aren’t yet available, but according to SPIVA research, here’s how Canadian fund managers have performed longer term:
10-year track record of Canadian fund managers
Source: SPIVA
Blame it on their high fees or general lack of stock-picking talent, but the overall track-record for Canadian fund managers is dismal. Better to own the Canadian equity market through a low-cost ETF.
Proponents of active stock picking might argue that if you simply focus on the ‘hot hand’ fund managers then you’ll greatly improve your odds of selecting a winner. The thinking here being that genuine skill, once spotted, will be more likely to persist. Nope.
The third lesson: remember the Monte Carlo fallacy. Past results have no bearing on future odds. A ‘hot hand’ offers no assurances of future outperformance. SPIVA research further points out:
Among 169 funds in seven categories that placed in the top quartile for the 12-month period ending December 2020, only 2 managed to remain in the top quartile for the next four years.
Sadly, there’s no ‘persistence of skill’ amongst Canadian fund managers. Again, just buy an ETF.
The final lesson relates to the recession risks highlighted at the outset. If, in fact, Canada does drift into recession then our equity market is destined to struggle too, right? Wrong again. The Canadian equity market often sells off when the economy is good and often does well when the economy is suffering. There’s little relation between the two. The S&P/TSX Composite, for instance, did very well during the dark economic times of 1991, 2009 and 2020:
The Canadian stock market isn’t the Canadian economy
Source: FactSet, Raymond James Ltd.
So, has 2025 played out in the ways that you expected for Canada? You anticipated a US president desiring to make us the 51st state? Canada being relentlessly targeted in a hostile trade war? Pierre Poilievre snatching defeat from the jaws of victory and the Liberals remaining in power? Our unemployment rate, as mentioned, soaring to a nearly a four-year high? The president eventually visiting Canada but leaving early to maybe bomb Iran? And it’s only June.
Ostensibly, the Canadian equity market should be down this year.
But remember the lessons. Always beware your expectations.
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.