September is historically the worst month of the year and this year didn’t disappoint. Wait, yes it did. The TSX Composite was down about -3.7% and the S&P 500 was down about -4.9%. Year to date, Canada was only up about 0.8%. The S&P 500 and NASDAQ have vastly outperformed Canada and the Dow Jones Industrial Average. What’s next?
After a rough September we do expect a recovery in October and through to the end of the year. Our thesis is that Canada will continue to underperform the US for a host of reasons. In order, some of them are as follows.
Personal Debt Levels
The Americans have done a far better job of reducing debt in past years than we have in Canada. According to the OECD, the ratio of household debt to disposable income has been trending upward in recent decades, and this trend has been far stronger in Canada compared to the U.SA. In Canada in 2000, the ratio was about 110%. It is now much higher. In 2021, it was 187%. In the U.S. in 2022, the ratio was only 102%. In other words, for every $1 earned in Canada, we owe $1.87. In the US, for every $1 earned, they owe $1.02. This means the average American has more money to spend on discretionary goods or home improvements, boosting their economy. In Canada, we have significantly less to spend.
Interest Rates
This dovetails with personal debt levels. Rates are high and the “higher for longer” phrase has been thrown about a lot lately. Canadians will be spending more just in servicing their debt than spending money to boost the Canadian economy. The biggest chunk of Gross Domestic Product (GDP) is consumer spending. This includes food, clothing, healthcare, entertainment, and housing. Housing is the big one because it includes mortgages. If Canadians are paying a larger proportion of their total income on their mortgage, it is at the expense of everything else. This doesn’t paint a good picture for the Canadian economy.
Recession
The traditional definition of a recession is two consecutive quarters of negative GDP. Q2 was negative in Canada but still positive in the US. Our thesis for 2024 is that Canada will not be able to avoid a recession, but the US will most likely experience a “soft landing” or none at all.
Lack of Diversification
You have likely heard us say this before but in Canada, we only really have three sectors; Energy (oil and gas), Materials (mining and lumber) and Financials (banks), and they are highly correlated. The U.S. on the other hand has sectors we just don’t have, like tech and healthcare. The big contributor to U.S. performance this year has been the tech sector, think AI and Microsoft.
Conclusion
One last point in favour of the U.S. vs. Canada for 2024. It is an election year. Since the S&P 500 started, there have been 24 Presidential elections. U.S. equities were up in 20 of the 24 election years. What’s
more is that the average return in an election year is 11.30%. Let’s hope that trend keeps up for next year and we will continue to overweight the U.S. relative to Canada.