Decade of in-Decadence

March 11, 2021 | Matt Barasch


Coming out of the Global Financial Crisis (GFC), most markets performed in a similar fashion for a period of time. There were lots of factors for this – everything was crushed in 2008/09, governments throughout the world had performed both fiscal and monetary surgery, and there was a lot of dry powder from an economic perspective after what amounted to the longest recession in three decades. Let’s take a look at a chart of the S&P/TSX (total return) vs. the S&P 500 (total return), over that 2-years or so post the GFC (note that we have re-based both to 100):

As you can see, it is hard to tell the difference between the two with both returning about 190% (unadjusted for currency). If we adjust for currency and the fact that CAD went from the high $0.70’s to over par over that period, then a Canadian investor would have done quite well staying home for that ~2-year period:

Okay, so all things being equal – all boats rose post 2009 and when we factor in currency, the TSX looked like a champ, outperforming the S&P by about 40%.

Then, let’s just say, things changed. Let’s first look at the chart of the last decade when not factoring in currency:

As you can see, it has been an ugly 10-years for the TSX on a relative basis. To put the above in perspective, a dollar invested in the TSX in March of 2011 would be worth about $1.72 today, which is not too shabby (~5.6% compounded), but would pale in comparison to the dollar invested in the S&P 500, which would be worth ~$3.50 today or a compounded annual return of ~13.4%. Okay, while it feels like piling on, let’s adjust for currency:

While the TSX obviously does not change, from the lens of a Canadian investor, the S&P now returns $4.60 per dollar invested or a remarkable 16.5% compounded. To put that in perspective, you double your money roughly every 4-years at that rate. Now let’s look at it on a quarterly basis:

So, over the past 40-quarters, the TSX has outperformed 15 times and underperformed 25 times, which on its face is not great, but seems better than one might have thought. But consider this, while the S&P has outperformed in 25/40 quarters, nine of those quarters have seen outperformance of at least 5%, while of the 15 quarters the TSX has outperformed, none have exceeded 5%.

Okay, now, it is worth pointing out that what we have seen over the past decade is not unlike what we saw over the prior decade; although, that was the reverse as you probably recall – the TSX consistently and somewhat massively outperforming the S&P, especially when adjusted for currency from 2001 to 2011:

From 2001 to 2011, $1 invested in the TSX returned about $2.50, while $1 invested in the S&P 500 (in CAD), returned about $0.86. When I would do client events at that time, I would inevitably move to the portion of the evening in which I would try to convince Canadian investors that they should look at the U.S. market. I would call this “the tomato throwing portion of my presentation” as Canadian investors in U.S. stocks were hit for close to a decade by both a decline in U.S. stocks and a rising Canadian dollar and thus it was not a popular recommendation.

Okay, so the $5 question is, what are the chances that the next decade sees us flip back? There has obviously been some excitement around this over the past three or four months as investors start to fret over inflation and, as part of that, the chance for another commodity boom. Let’s first look at a chart and then comment:

If we go back a decade ago, the TSX was 50% Energy & Materials with another ~30% in Financials. In other words, it was bet on basically two things – a commodity boom and banks. The former obviously did not play out, whereas the latter was a mixed bag. Meanwhile, the S&P was about as balanced as you could hope for – no sector accounted for more than 20%, and while it was a bit light on a few things, there were seven sectors that were weighted at least 10%. Okay, now let’s flip to 2021:

Let's digest the current situation:

  • The TSX, which had three sectors account for 80% of its exposure a decade ago and 50% in commodities, looks a lot more balanced – the three largest sectors account for ~55%; although, Financials at 31% are still a massive bet on banks and insurance;
  • The S&P has lost a fair bit of the balance it had in 2011. Then it had seven sectors of 10% or more, whereas today it has only five, while Technology is now approaching 30%. In fact, this understates the Tech transformation as index changes a few years ago shifted what many people still think of as tech stocks, such as Amazon, to other sectors, such as Consumer Discretionary and Telecom.

Let’s now look at a couple of more things related to this and wrap up. The first chart is interesting, but suffers from one problem that we will get to in a moment:

Here, we are comparing the TSX to what it looked like in 2001 – right before the last commodity boom and a decade of TSX outperformance. For the most part, it looks strikingly similar save for one thing – the Nortel effect, which massively skewed the weighting in Tech back in 2001 (ironically, Shopify has a similar but less pronounced impact in 2021).

If one wanted to bet that a decade of outperformance (or at least a few years) was coming for the TSX, this chart would certainly not hurt your thesis. However, before you go run to the TSX store to stock up, we would note that unlike in 2001 when we were in the early stages of a China-led commodity boom colliding with a decade of underinvestment in commodity projects, we do not have the first piece (China) to the same degree this time around and the second piece (underinvestment) is also not nearly as acute as it was back then.

Okay, one last chart (this is a humdinger):

Now, we are looking at the same chart, except for the S&P 500 instead of the TSX. The weights are remarkably similar with the only big differences (>5%) coming in Telecom (again, there were index changes that impact this) and Financials (mainly because of the GFC).

Now, before you run to the S&P store to sell everything, it is worth noting that while Tech is similarly weighted today as it was then, it traded at 40x forward earnings back then vs. ~25x now, while 10-year rates, which we are all apparently panicked about now, were 5.2% back then vs. about 1.6% today (in other words, those PE’s should probably be flipped).

Bottom Line: The last thing anyone wants to do is an abrupt shift in asset allocation based on a few months of data and some charts that have some eerie similarities. That said, we are in an interesting time when we have an economy that is going to clearly recover like gangbusters over the next 4-8 quarters, while simultaneously fed a massive amount of stimulus that it may not need (but why waste a good crisis?).

Thus, there’s probably a case to be made for some shifting. If you were 50/50 Canada/U.S., going to 55/45 (in other words, shifting 5% out of U.S.), this would not be crazy in my eyes (for the record, I have not done this to that extent, but I am contemplating it). Doing something more extreme probably would, as beyond 4-8 quarters, I am fairly skeptical about what the recovery looks like as we are eventually going to have to pull away from this stimulus and start to face some of the massive imbalances we created over the last 12-months (not to mention the next few months).