Investing

Why the TSX index increase does not reflect Canada's fast GDP growth?

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  • Sep 4th, 2017 6:01 pm
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Jr. Member
May 5, 2012
154 posts
74 upvotes

Why the TSX index increase does not reflect Canada's fast GDP growth?

Canada's GDP grew at 4.5% annual pace in 2nd quarter, fastest since 2011
Canadian economy is growing 50% faster than the 3% growth seen in the United States
http://www.cbc.ca/news/business/gdp-jun ... -1.4269811

YTD INDEX RETURNS:
TSX Composite -0.50%
US market +11.57%

http://news.morningstar.com/index/indexReturn.html


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14 replies
Deal Addict
Dec 3, 2014
1240 posts
287 upvotes
Ontario
A big chunk of the TSX is oil related. Much of the remainder is related to housing and financials, both which have significant risks facing them in the form of an inflated housing market which is due for a correction or full-popping and then there's the related consumer debt issue.

Regarding the growth, National Bank senior economist comments: "It's unlikely this can be sustained"

I have also read that the driving force behind our GDP growth is consumer spending, which further underscores the consumer debt problem.

Go all-in on the TSX at your own risk. One quarter does not make a market.
Newbie
Nov 12, 2014
97 posts
61 upvotes
Levis, QC
Stronger CAD is also an issue for the TSX.
Deal Addict
Nov 9, 2013
3144 posts
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Edmonton, AB
te1648 wrote:
Sep 1st, 2017 4:25 pm
Canada's GDP grew at 4.5% annual pace in 2nd quarter, fastest since 2011
Canadian economy is growing 50% faster than the 3% growth seen in the United States
http://www.cbc.ca/news/business/gdp-jun ... -1.4269811

YTD INDEX RETURNS:
TSX Composite -0.50%
US market +11.57%

http://news.morningstar.com/index/indexReturn.html


Image
GDP growth and index returns are not greatly correlated.

See https://www.msci.com/documents/10199/a1 ... adb948f578 and https://www.wise-owl.com/investment-edu ... et-returns
Deal Expert
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Sep 19, 2004
22529 posts
4374 upvotes
Waterloo
Join this big/long thread, where we had this conversation

merged-another-bloody-red-day-tsx-469115/421/

Oil is nowhere near highs
NAFTA concerns
Housing

Poor TSX is getting no love in 2017, like 2015
hoping 2018 is like 2016 where TSX popped
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Deal Fanatic
Nov 24, 2013
5650 posts
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Kingston, ON
The TSX index isn't a reflection of the Canadian economy nor a measure of its strength (nor does S&P 500 or DJI specifically reflect the US economy). It's a reflection of investment activity in the index's component companies.

https://m.ca.investing.com/indices/s-p- ... components

If Enbridge and CN Rail and Suncor are struggling (some of the top 10 weighted companies), it doesn't matter how rosy the Canadian economy is overall. Canadian-listed companies have business activities in other countries too, so it's not all Canada-related.
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May 11, 2014
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Iqaluit, NU
Mike15 wrote:
Sep 2nd, 2017 11:14 am
The TSX index isn't a reflection of the Canadian economy nor a measure of its strength (nor does S&P 500 or DJI specifically reflect the US economy). It's a reflection of investment activity in the index's component companies.

https://m.ca.investing.com/indices/s-p- ... components

If Enbridge and CN Rail and Suncor are struggling (some of the top 10 weighted companies), it doesn't matter how rosy the Canadian economy is overall. Canadian-listed companies have business activities in other countries too, so it's not all Canada-related.
This...also.... corporations in Canada own a larger portion of the economy than the average, meaning that any economic growth created is proportionally larger and owned by the corporations.
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Deal Addict
Oct 6, 2015
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1) The GDP numbers are likely exaggerated, due to comparison with some incredibly weak months a year ago, due to data collection error/bias, due to use of the wrong GDP deflator. The employment market would be much, much better at 4.5% GDP growth for example, instead of being absolutely awful, low-end service sector jobs aside.

2) The TSX has been in a 16-year long bear market as everyone's been interested in speculating in houses and bonds instead. Bear markets are hard to break, just like bull markets go on for much longer than anticipated.

3) The market is increasingly concerned that Poloz is fighting the wrong enemy. Deflation, not inflation is the problem. This can impact forward expectations, especially if there are future rate hikes not warranted by the fundamentals.

4) When the TSX has broken out, it historically does so in a big way. There was a year I think in the 1990s where the TSE300 basically doubled, IIRC. So if the economy is really that good, growing faster than the US, P/E ratios could revert to those similar to that in the USA, which would imply a very severe increase in TSX stock prices.
Deal Addict
Jul 23, 2007
3809 posts
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If there's been a 16 year year bear market in the TSX I haven't noticed. According to Globefund invest $10,000 in the TD Canadian Index e-Series 16 years ago and it would be now worth over $32000.
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Oct 6, 2015
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Stryker wrote:
Sep 2nd, 2017 3:36 pm
If there's been a 16 year year bear market in the TSX I haven't noticed. According to Globefund invest $10,000 in the TD Canadian Index e-Series 16 years ago and it would be now worth over $32000.
The TSX peaked at ~11,000 in 2001. Today its only 15,200. That's only keeping up with inflation over the same interval, which is quite atypical given that the economy has grown considerably faster than inflation, ie: experienced positive real GDP growth.

The return since 2001 has been mostly re-invested dividends.

Historically the TSX grows at 10% over the long term including dividends, so 16 years @ 10% should've meant $10k is now worth ~$46,000. So only being worth $32,000 is a considerable lag behind historic norms, ie: a bear market, the long-term process of collapsing the bubble in the 1990s. Likely to coincide with the air draining out of the housing market, IMHO.

Fortunately, the longer bear markets continue, the greater the recovery out of them and the stronger the overshoot to the upside. At some point, investors will wake up and bid it up.

How does a 67,000 TSX index sound to you by the end of 2023 / early 2024, ie: 7-8 years from now? That's what you get if you draw a long-term TSX trendline. A quadrupling, basically repeating the experience of the 1990s with a blow-off top probably in the gold miners (instead of the tech stocks as in the early 2000s!).
Sr. Member
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Oct 14, 2015
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According to StockCharts.com
TSX has slightly more than doubled in the last 16 years,
while CAD is about 25% higher in the same period.

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Oct 6, 2015
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IrwinW wrote:
Sep 2nd, 2017 6:09 pm
According to StockCharts.com
TSX has slightly more than doubled in the last 16 years,
while CAD is about 25% higher in the same period.
Yeah if you expand that chart out a little earlier, you have it up at 11k, which was the peak of the then-Nortel/tech bubble. Its basically been a bear market since that peak, with historically very low returns. Over a 16-year period, growth of 3-5X is more typical, reflecting a long-term return in the 10-12% range, 2-3% of which historically arises from dividends.

The TSX index P/E is what, around 15 these days, so invert that, add 1.2% for inflation, add 4.5% for real GDP growth, and the implied return is in excess of 12% which is absolutely and utterly crazy undervalued in an environment where 30-year GoC bonds are trading at a bit over 2%. The TSX should be flying, not only because of presumably blistering earnings growth, but to make up for all the multiple compression that has occurred during the past 17 years or so of low growth and multiple compression.
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Dec 3, 2014
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burnt69 wrote:
Sep 2nd, 2017 4:59 pm
The TSX peaked at ~11,000 in 2001. Today its only 15,200. That's only keeping up with inflation over the same interval, which is quite atypical given that the economy has grown considerably faster than inflation, ie: experienced positive real GDP growth.

The return since 2001 has been mostly re-invested dividends.

Historically the TSX grows at 10% over the long term including dividends, so 16 years @ 10% should've meant $10k is now worth ~$46,000. So only being worth $32,000 is a considerable lag behind historic norms, ie: a bear market, the long-term process of collapsing the bubble in the 1990s. Likely to coincide with the air draining out of the housing market, IMHO.

Fortunately, the longer bear markets continue, the greater the recovery out of them and the stronger the overshoot to the upside. At some point, investors will wake up and bid it up.

How does a 67,000 TSX index sound to you by the end of 2023 / early 2024, ie: 7-8 years from now? That's what you get if you draw a long-term TSX trendline. A quadrupling, basically repeating the experience of the 1990s with a blow-off top probably in the gold miners (instead of the tech stocks as in the early 2000s!).
67,000 TSX ? You have to be kidding
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Oct 6, 2015
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llpresident wrote:
Sep 3rd, 2017 2:17 am
67,000 TSX ? You have to be kidding
1990-2001, the TSX went up 3X. In the midst of a depression in the resource sector nonetheless. And coming off a much smaller housing bubble in the late 1980s than experienced this time around.

A 11,000 TSX would've seemed absurd in 1980 when the TSX was 2,000. Yet 21 years later, that's exactly what happened.
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Oct 14, 2001
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GMA
The thing is that we're in a more and more globalized economy so the whole idea of a country's stock market reflecting it's economy is no longer valid. The TSX is heavily correlated with oil prices which itself has very little to do with Canada.

Other good examples, a company like Dream Global REIT has zero revenues and zero assets in Canada but strangely, given that it's HQ'd in Canada, it is consider by most, as a Canadian REIT. Same argument could be made for Algonquin Power which, if I remember correctly, is generating over 80% of its revenues in the US.

The ultimate consequence is that if it wasn't for the fiscal advantage of Canadian dividends, a passive investor shouldn't have any valid reason to have a home bias in his asset allocation.

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