Wednesday, October 10, 2018

Why the Dow and S&P keep rising and Canadian markets suck

Canadian readers who play the stock markets are painfully aware that their portfolios of Canuck stocks are not keeping up with inflation, whereas investments in Donald Trump's America keep going up and up. Before the bell this morning, the Dow stood at 26,430.57 while the TSX languished at 15,854.05, in spite of the frenzy for cannabis stocks and the generally good economic numbers coming out of the Great No-longer-white North.

Why is this? George Athanassakos, a professor of finance and the Ben Graham Chair in Value Investing at the University of Western Ontario's Richard Ivey School of Business, has the answer. He calls it "the Trudeau effect". According to Prof. Athanassakos, statistics measuring employment, production and the like paint a picture of the economy as it is. Today's picture may be rosy enough, he says, but investors are thinking about tomorrow and the next day, trying to predict whether things will get better or worse. And when they look at the policies and actions of Just In Trudeau's Liberal government, they are not encouraged, so they don't pile into an "iffy" market.

The professor's thesis is nicely summed up in "The 'Trudeau Effect' dragging down Canada's stock markets just got much, much worse", published in Canada's Financial Post today. It's so good that I'm going to repost the whole thing, hoping that the Post and the prof won't mind. [We don't make any money from WWW -- not one red cent! Ed.] Here `tis. The emphasis is mine.

A few months ago I wrote in these pages about the “Trudeau effect,” my term for the serious underperformance of the Canadian stock market vis-à-vis the American markets since the election of the federal Liberal government under Justin Trudeau.

The differential market performance has become even more pronounced since I wrote that article, especially in the last three months. Over the last two years, as of the end of September 2018, State Street’s SPDR S&P 500 ETF Trust (ticker: SPY), which is designed to track the S&P 500, outperformed its Canadian equivalent, the iShares S&P TSX 60 Index ETF (ticker: XIU) by about 11.5 per cent on an annual basis. But from July to September 2018, we have seen the U.S. market index outperform the Canadian stock index by a whopping 28.8 per cent annualized.

One might ask: Why look at the stock market and not the performance of the economy? Indeed, Canada’s economic performance is one of the best in the G7 while the stock market has been a laggard. So what is a better gauge of successful management of the economy and the country? Should economic performance not be highly correlated with the stock market?”

In reality, the stock market discounts the future not the current economic performance. And Canada’s future looks less than clear under the stewardship of this Liberal government.

Trudeau and his ministers have made it clear they want corporations to become benevolent organizations that put workers before shareholders. They favour taxing corporations and the rich, and adding regulatory impediments and red tape to corporate activity. They are big supporters of income redistribution as opposed to making the pie bigger for everyone. They want to regulate the economy and nudge corporations to submit to the Liberal government’s social views and economic philosophy.

Their policies take away economic entrepreneurship and wealth creation and replace it with handouts to every significant lobby and activist group. The Liberal government increasingly seems not to understand how people get jobs and how they get by, and how heavily favouring environmental issues stirred up by activists over economic concerns takes jobs away.

There’s an old saying that if you’re not a communist at the age of 20 you haven’t got a heart and if you’re still a communist at the age of 40, you haven’t got a brain. Canada today seems to be run by politicians in their 40s behaving like they’re in their 20s. Focusing only on the environment or on social engineering at the expense of working families is elitist. And Canadians are getting the sense that they are governed by a bunch of idealistic and dogmatic college students convinced they will save the world.

The Liberals have crossed swords with powerful countries. They have antagonized the United States, Russia, China, India and Saudi Arabia, just to mention a few. But a small country like Canada has to co-operate with powerful countries, not sit and judge them disapprovingly from some moral high horse. And progress takes time. Improvements to society and the world happen incrementally, not instantaneously.

When a democratically elected majority government ends up following policies driven by activists, it is neglecting its larger mission and mandate and that will eventually hurt the economy. This is what the stock market is anticipating.

Footnote: The photo of Mr Socks making cow eyes at George Soros did not appear in the Post!

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