Diary of a Portfolio Manager

Good day,

Are you up for a short history lesson?

TSX Annual Returns 1957-2022

2022 was the 19th time the TSX has delivered negative returns for a calendar year since 1957. The long-term trend for the TSX is usually upwards because the economy and profits expanded over time, but 2022 was a reminder that this long-term upward trajectory can be interrupted occasionally by sharp downside volatility.

On a total return basis, the TSX has been down roughly a third of the years since 1957. During these 19 down years, the TSX posted average returns of -9.8% (median: -8.3% and range: -0.2% to -33.0%), with roughly a third of the years reaching double-digit territory.

What does history say about returns after down years? Although not unprecedented, history shows that two consecutive years of losses are quite rare for the TSX (see above). The index has only posted a negative total return for two straight years twice—1969-70 and 2001-02. More broadly, in the year following the negative years, the TSX had advanced 17.2% on average (median: 18.3% and range: -12.4% to +35.1%) and is positive roughly 90% of the time.

What is my takeaway from this, you ask? Investors looking ahead at 2023 can feel some comfort in the fact that successive negative years are uncommon for the TSX, which has posted two consecutive down years less than 5% of the time since 1957. In the select instances that the index has been down more than one year in a row, it always coincided with major U.S. economic downturns or other macro shocks. For our take on the Canadian equity market’s outlook for the year ahead, please refer to the Global Insight 2023 Outlook.

On balance, RBC believes “the Canadian economy is likely to slip into recession in 2023, but markets are starting to look past this threat. The equity market, including bank stocks, is already pricing in a modest economic contraction and housing market retrenchment". History shows that markets are down in the year leading into a recession and then bounce back quite nicely by the time we realize that we are on the other side of it.