TSX deep dive

RYAN   By Guest Blogger Ryan Lewenza

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I was recently trashed in the comments section, something I’ve had to get used to on this merciless blog. The angry commenter derided me for focusing my research and commentary on the US economy and S&P 500. So today I provide a deep dive on the S&P/TSX Index (TSX) and hopefully atone for my sins and gain sweet mercy from said commenter.

Here it goes…

The TSX has kind of sucked in recent years, especially relative to the US equity markets. For example, the TSX has returned 4.4% annually over the last five years, less than half of the S&P 500 at 10.7%. Longer term (e.g., 20 and 30 years) the TSX has also lagged behind the S&P 500. So what gives?

Long-term Equity Returns

Source: Bloomberg, Turner Investments; as of June 28, 2020

A big reason for the underperformance has been due to our devastated energy sector. I’ve spoken ad nauseam about this and how I believe we need a more supportive Federal government and the darn Trans Mountain pipeline expansion so we can have more than just one buyer for our oil (the US buys 99% of our oil exports, which given the US shale revolution means less demand for our oil).

Below I show the connection between the TSX and oil prices by charting the year-over-year percent change in TSX earnings and WTI oil prices. Note the correlation and how declining oil prices generally weighs on TSX earnings. Given this relationship, we need oil prices to rebound strongly for the TSX to really start moving again. On a positive note I see oil prices possibly getting into the US$60s next year as demand recovers but I don’t see US$80-$100/bbl any time soon.

Oil Prices and TSX Earnings

Source: Bloomberg, Turner Investments

Another reason the TSX has lagged behind the US is more about what we don’t have in the TSX – information technology, consumer discretionary, and healthcare stocks. These have been some of the best performing sectors in recent years, which given the combined weight of 14.8% of these sectors in the TSX versus 53% in the S&P 500, this also helps explain the TSX underperformance.

Let’s face it, the TSX remains a financials and resources driven index with those sectors representing 56% of the TSX. The good news is I see Canadian banks doing a lot better next year as the economy rebounds and credit losses peak this year. Combined with my expectation for a slow recovery in oil prices, 2021 is looking a bit better for our equity Canadian markets.

TSX Sector Breakdown

Source: BMO ETFs, Using ZCN as proxy for the TSX

Another big positive for Canadian equities are their cheap valuations. Below I chart the TSX price-to-book ratio (P/B) and currently it’s trading near a 27-year low of 1.5x, well below the long-term average of 2.2x. In contrast, the S&P 500 trades at a high P/B ratio of 3.5x. While we’re still bullish on the US equity markets and have a good weighting to the region, we are keeping a mindful eye on those elevated valuations.

S&P/TSX Price-to-Book Ratio (P/B)

Source: Bloomberg, Turner Investments

Even better, at the March lows the TSX fell below the magic 1.4x P/B level. I say “magic” since every time the TSX traded down to these dirt-cheap levels (09, 04, 98 and 95) we saw the TSX deliver great subsequent returns.

From the table below you can see that the TSX returned on average 27% over the next 12 months and 68% over the next 24 months, when it traded down to this 1.4x P/B level. If history repeats, we could be looking at some good returns over the next few years.

Basically, the TSX underperformance has compressed valuations to the lowest level in years, which could be setting the stage for much better returns in the years ahead.

TSX Returns After it Drops Below 1.4x P/B

Source: Bloomberg, Turner Investments

One final consideration for Canadian equities and the TSX is the attractive dividend yield it offers. Currently the TSX yields 3.5%, in large part due to the sweet 4% dividend yields offered by the big banks. Compare that to the S&P 500 yielding 1.7% and government bonds below 1%. Add in the tax advantage of Canadian dividends versus US and international equity dividends, Canadian stocks look more and more attractive each day.

S&P/TSX Composite Dividend Yield

Source: Bloomberg, Turner Investments

Ok that was a lot of numbers and boring information about sectors, valuations and dividend yields, so the key takeaway of today’s blog is that the TSX has underperformed in recent years, but I believe this underperformance could be setting the stage for a much better decade ahead. For our clients we continue to invest 2/3rds of their equity exposure in the US and international markets, but there could be a day when we decide to trim this back and beef up our TSX weight given some of the factors I highlighted today.

Now let’s see if that blog dog commenter throws me a bone and appreciates today’s topic on the TSX. I’m not holding my breath!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

88 comments ↓

#1 Flop... on 08.01.20 at 10:39 am

Rhino, good one.

I’m hoping some of your predictions come to fruition, as I’m overweight on Canadian Equity’s.

I don’t know why I do it.

Home country bias is apparently a thing.

Maybe deep down it’s because I’m grateful to be granted permission to stay in Canada with my wife.

Should have just made a one-time payment…

M46BC

#2 crowdedelevatorfartz on 08.01.20 at 10:40 am

Ryan.
Never, ever kowtow to a commenter’s whining.
Like a dog to a bone.
It sets a precedent.
And the dog will still keep growling for more bones.

Another informative piece in easy to read format.
Now go polish the Porsche.
Thanks and enjoy your Long Weekend.

#3 YouKnowWho on 08.01.20 at 10:45 am

How is this for a first paragraph of a Globe and Mail article today?

Shall I still post a song about human touch? Nash…this will do!

>
Alberta Health Services suggests “masturbation in a private setting.” Toronto Public Health endorses “consensual sexting, virtual sex or video dating.” And the BC Centre for Disease Control proposes “barriers like walls (e.g., glory holes) that allow for sexual contact but prevent close face-to-face contact” – a startling recommendation from a provincial service that garnered international headlines and much teasing.

#4 Faron on 08.01.20 at 10:52 am

Thanks for your excellent post Ryan. Your analysis coupled with Garth’s observation w/re virus stabilization leads one to believe the next year or two will beat those other magic P/B periods. Canada is looking more and more safe to the world’s $$$.

One question. As a greenie (actually the centrist view ex NA), I see that the CDN economy eventually has to face weaning off of oil+gas. First, do you agree? If so, how do you see that playing out? And on what timescale(s)? What will Canada’s economic composition transition to? Financials + ?

I read an article that Total sees its stake in tar sands ($8 billion worth) as “stranded” as of an announcement yesterday. These announcements may ramp up as the globe transitions away from Canadian O+G.

#5 TSBAC on 08.01.20 at 11:15 am

Thanks Ryan, excellent post that answers many of the questions I’ve had regarding the TSX’s lack of performance. I’ve always wondered why my financial advisors use only Canadian equities and fixed income in my balanced portfolios. I understand the preferential dividend tax treatment but I’ve really missed out on a lot of strong growth over the years in the US and international markets. Any thoughts out there on my advisors motivation for this?

#6 50 YEARS OF MAPLE LEAF INCOMPETENCE! on 08.01.20 at 11:17 am

The Make Believes are unbeaten in 150 days!

Toronto has had barely two dozen shootings in the last week!

Only 7,645 speed camera tickets in Trauma Ontario the last two weeks – talk about considerate drivers!

No wonder the TSX has such potential! It’s in the greatest place on earth!

WooHoo!!

TorontHole is Number 1!!!!!

#7 Buy? Curious? on 08.01.20 at 11:30 am

Ryan, as much pain as I feel when I come to this blog and find you, Ryan is the author (That could be your hip hop stage name if you want to make a career change), kind of like going to strip club to see Stormy Daniels and instead finding out it’s Nina Hartley, I am grateful that you’re at least entertaining me for free.

#8 Thank you on 08.01.20 at 11:36 am

Hi Ryan thanks for the posts!
Yeah to many idiots on this blog,
Put on the alligator suit and raise your middle finger.
Have a great weekend
Thanks for the tip on the banks buying ZEB!
One thing I learned recently is ZEB pays as interest distribution and not dividends. Oh well 6 to 7 percent percent is still a good yield and paid monthly
Have a great weekend

#9 Al on 08.01.20 at 11:41 am

Ontario Provincial Govt employees refuse to return to work citing Covid risk and prefer to stay in the Muskokas until September whilst getting full pay.

#10 George on 08.01.20 at 11:46 am

The only exposure I have to the tsx is in non-registered accounts due to the tax advantages.

Or else id likely have about tops 4-5%

The tsx is not diversified : banks and energy kudos to Shopify tho ! Hopefully we can get a leader that rewards entrepreneurs, need to get numbnuts out tho! Cerb ,free monies will likely keep him in

Rip Canada

#11 baloney Sandwitch on 08.01.20 at 11:50 am

Excellent post. Dividend tax credit is a life safer for retirees and other of the rentier class. Wonder how long that will last, post covid.

#12 JPN on 08.01.20 at 11:58 am

Thanks for the great post Ryan.

I’m always curious about the actual advantage that the dividend tax credit has when held in a non-registered (taxable) account.

For example if one were to hold XIC/ VCN versus VFV or VUN would the dividend tax credit make a huge difference considering the yield on VFV is so much lower?

Wouldn’t the increase in share price of VFV matter more considering that capital games are taxed at half your marginal rate to begin with?

#13 dogman01 on 08.01.20 at 11:59 am

Global Migration of Millionaires

Thought it was interesting.

https://www.visualcapitalist.com/global-migration-of-millionaires/

#14 DON on 08.01.20 at 12:13 pm

@ the Jag

yup…sit back enjoy the rest of summer. The media is failing us. And the comments…yup.

@ Nonplused. Those BC interior reform conservatives are the ones telling Albertans to stay away. Not us conservative Islanders for the most part…besides we have been lobbying fellow islanders to pull up the anchors in the hope that we will drift towards Hawaii. I hear hope has strong tail

On another front…folks will be transitioned from CERB to EI…but now they will be applying anti fraud measures.

#15 tkid on 08.01.20 at 12:24 pm

Thanks, dude!

#16 ain't life rand on 08.01.20 at 12:26 pm

any thoughts on the looming CLO problem?

#17 Bguy1 on 08.01.20 at 12:26 pm

Ryan,

Since over 25% of the index is mining/energy/materials (which tend to be more volatile) would one be better off buying a subset of the index – say banks, insurance, and consumer staples (essentially the sectors in Canada that are oligopolies and have low volatility)?

Thanks!

#18 MF on 08.01.20 at 12:41 pm

3 dogman01 on 08.01.20 at 11:59

That is interesting. Thanks for posting.

Definitely flies in the face of the false idea that our taxes are “too high” and that wealthy people are leaving.

(I posted here before that our taxes are actually middle of the pack, and that tax levels have little bearing on how functional a society actually is anyways).

So, who would have thought? A civil, stable, cohesive society, with a functioning government is where wealthy people would like to set up shop.

No surprises there. Good in them and welcome.

MF

#19 No Ghenghis Khan Just awake on 08.01.20 at 12:46 pm

DELETED

#20 TurnerNation on 08.01.20 at 12:48 pm

It’s all coming together now. Toronto parks even City Hall flooded by new large identical tents this spring. Sometimes three dozen in a smaller park. Why when evictions are forbidden, rental inventory is high and everyone can get free CERB?
These people might be Props. I see the cases of beet stacked outside, people sitting all day in lawn chairs.
To what end? City of Toronto talking about scooping up underwater Air B&B for low income housing.
Park people living in swanky new condos.
Governments forcing desperate landlords into expropriation. Property values will go…?

Don’t be surprised. This is the New System being rolled out. Wasting little time. Socialize losses and privatization of profits. This system is known as C

.

#21 akashic record on 08.01.20 at 12:52 pm

Peaceful 20K anti-mask demonstration in Berlin.

https://www.dw.com/en/germany-police-halt-berlin-protests-against-coronavirus-curbs/a-54402885

#22 Victor V on 08.01.20 at 12:56 pm

“ For our clients we continue to invest 2/3rds of their equity exposure in the US and international markets, but there could be a day when we decide to trim this back and beef up our TSX weight given some of the factors I highlighted today.”

Based on your analysis Ryan, it seems that now would be the right time to increase weighting to the TSX. What is your rationale for waiting…?

#23 crowdedelevatorfartz on 08.01.20 at 1:11 pm

Hmmm, Vancouver City Clowncil gets a taste of their own “progressive” pandering to drug addicts.
A once vibrant neighborhood is reduce to living in fear.
Keep paying your property taxes people.
The Homeless drug addicts need universal basic income.
Where’s Hizzoner?
Political Science Major Kennedy Stewrat while all this unfolds?

Crickets.

https://bc.ctvnews.ca/man-threatens-to-stab-vancouver-city-councillor-video-1.5047889

#24 Ryan Lewenza on 08.01.20 at 1:24 pm

Faron “Thanks for your excellent post Ryan. Your analysis coupled with Garth’s observation w/re virus stabilization leads one to believe the next year or two will beat those other magic P/B periods. Canada is looking more and more safe to the world’s $$$.

One question. As a greenie (actually the centrist view ex NA), I see that the CDN economy eventually has to face weaning off of oil+gas. First, do you agree? If so, how do you see that playing out? And on what timescale(s)? What will Canada’s economic composition transition to? Financials + ?”

I’m planning to do a blog post on this topic in the future. First, I believe the death of oil has been greatly exaggerated. The world currently consumes 90 to 100 mln bls/day. As countries like India and China continue to grow this should help drive demand even higher over the next decade. Yes alternative energies like wind and solar and EVs will continue to gain prominence and replace some carbon-based consumption, but I think we’re still decades away from being off carbon/oil. So I think we have plenty of time to adjust our economy to this reality. Given this view I believe Canada should continue to benefit from this by producing and selling our oil. If we decided tomorrow to put a moratorium on oil production in Canada to help combat climate change, the US, OPEC or Russia would just step in and replace those 4 to 5 million barrels. In this case, nothing would change for oil demand and consumption and all we would do is destroy AB and our economy and do nothing for addressing climate change. At the end of day its all about oil demand and until someone can tell me how we’re going to replace 100 mln bls/day of oil consumption, I see our world continuing to be carbon based and therefore we should try to profit from this. By profit I mean jobs, economic growth, Canadians overall well being and maintaining our high standard of living. I believe in climate change but I’m also a realist! – Ryan L

#25 Penny Henny on 08.01.20 at 1:27 pm

Currently the TSX yields 3.5%, in large part due to the sweet 4% dividend yields offered by the big banks.-Ryan
////////////////

By my calculation the big 5 banks are currently yielding 5.68%

#26 Ryan Lewenza on 08.01.20 at 1:32 pm

Bguy1 “Ryan, Since over 25% of the index is mining/energy/materials (which tend to be more volatile) would one be better off buying a subset of the index – say banks, insurance, and consumer staples (essentially the sectors in Canada that are oligopolies and have low volatility)?”

Yes and no. Given Canada’s small size and markets we don’t have nearly as many investment choices or ETFs that can get that specific (ie there are no Canadian consumer staples ETFs). You can more easily do this with individual stocks but you know our position on this. But there are some sector/industry specific ETFs like REITs, banks etc that you can invest in. Currently our ETFs include low volatility (very little exposure to resources), REITs (no exposure to resources) and dividends (some exposure through the pipelines). – Ryan L

#27 Ryan Lewenza on 08.01.20 at 1:38 pm

JPN “Thanks for the great post Ryan. I’m always curious about the actual advantage that the dividend tax credit has when held in a non-registered (taxable) account.

For example if one were to hold XIC/ VCN versus VFV or VUN would the dividend tax credit make a huge difference considering the yield on VFV is so much lower?

Wouldn’t the increase in share price of VFV matter more considering that capital games are taxed at half your marginal rate to begin with?”

The dividend yield is just one component of total return. So yes if VFV continues to outperform VCN then the preferential tax treatment of the dividends will not make up for the price appreciation, which as you pointed out, would be taxed at the lower capital gains rate. Always lost of different considerations when building portfolios. – Ryan L

#28 Democracy Is Mob Rule on 08.01.20 at 1:45 pm

Thanks Ryan. I find your posts informative and entertaining. I especially like the graphs.

The TSX will outperform the S&P 500 during the next oil boom in the decade of the 2030s.

https://economyandmarkets.com/wp-content/uploads/2017/11/Economy_Markets_11-28.png

In the mean time valuations are irrelevant as money flows into growth stocks and “disruptive” companies. Tesla is the new Nortel. The more money they lose, the higher the stock price goes. Nasdaq will be the best performing index for the next ten to twelve years.

#29 Ray Skunk on 08.01.20 at 1:46 pm

First thing I did when the crown prince of woke got elected was double down on US exposure. The CAD:USD was only ever going to head in one direction.

When the Orange Man got elected I quadrupled down.

Best decisions I made.

#30 PBrasseur on 08.01.20 at 1:49 pm

Canada is behind because it’s a socialist mess plagued with corrupt oligarchies. And that’s not a about to change.

#31 Ryan Lewenza on 08.01.20 at 1:49 pm

TSBAC “Thanks Ryan, excellent post that answers many of the questions I’ve had regarding the TSX’s lack of performance. I’ve always wondered why my financial advisors use only Canadian equities and fixed income in my balanced portfolios. I understand the preferential dividend tax treatment but I’ve really missed out on a lot of strong growth over the years in the US and international markets. Any thoughts out there on my advisors motivation for this?”

Unfortunately many financial advisors are living in the past and have not adjusted their approach/portfolios to the current reality which is 1) China needs to return to higher growth rates to help drive commodity prices higher, and in turn, the TSX, 2) US shale has changed everything for the global oil markets and 3) the future is technology, AI, online shopping, work from home, internet security, biotech etc, which Canada does not have much exposure to. And the sad thing is there are so many easy ETF options to get that international exposure. If your advisor is still just buying Canadian equities and bonds then you should consider making a change, as they may not be equipped to invest in this new global and interconnected world. – Ryan L

#32 dogman01 on 08.01.20 at 1:58 pm

Investing in Canada makes me nervous, no winning spirit here.

– Avro and the aircraft industry —kaput
– Nortel seemingly world class (at least 5000 decent jobs in NE Calgary) and apparently the IP source for the rise of Huawei
– Blackberry, smartphones early leader and then phfttt.
– Energy Sector – fossil fuels are going to continue to increase in use in the world. So all Canada’s doing by destroying its own industry is giving those production barrels and that opportunity to countries that don’t have the ethical system, and that don’t have the human rights system and that don’t have even the production efficiency of Canada. Canadians blocking Canadian energy to instead use Saudi Energy is NUTS.

Canadian Dream https://youtu.be/zo_S13SYeZw

Frozen Land, frozen minds, frozen hands and frozen times, cause everything moves pretty slow when it’s 40 below……

#33 JacqueShellacque on 08.01.20 at 2:28 pm

Hi Ryan,

The problem with this sort of analysis is that the only source of randomness are the past price fluctuations themselves. So a model or framework can only build in what’s occurred in the past, and it’s reliability for predicting the future should be considered suspect. So for that reason I’m less interested in anyone’s predictions of the future than in what they had predicted in the past. Can you post on what you had predicted for TSX future prospects or oil prices in 2010?

#34 ImGonnaBeSick on 08.01.20 at 2:29 pm

#8 Thank you on 08.01.20 at 11:36 am
One thing I learned recently is ZEB pays as interest distribution and not dividends.
——
Thank you, I think you should recheck this. ZEB distributes as dividend.

#35 ImGonnaBeSick on 08.01.20 at 2:40 pm

#12 JPN on 08.01.20 at 11:58 am
Thanks for the great post Ryan.

I’m always curious about the actual advantage that the dividend tax credit has when held in a non-registered (taxable) account.

For example if one were to hold XIC/ VCN versus VFV or VUN would the dividend tax credit make a huge difference considering the yield on VFV is so much lower?

Wouldn’t the increase in share price of VFV matter more considering that capital games are taxed at half your marginal rate to begin with?

—-

Eligible dividend tax credit is great, especially if this is your only source of income. It won’t go anywhere, if it’s ever proposed it should be strongly argued against since this would be double taxation.

In Ontario, an $80,000 income of eligible dividends would result in ~$77,000 in after tax income with $2100 going to the Federal and $750 going to the Provincial governments respectively.

$80,000 in capital gains would result in $74,000 after tax.

The difference is that to receive $80,000 in eligible dividends you would need to invest around $2.5m in Canadian stocks… Pretty risky since it’s not very diversified then.

#36 MF on 08.01.20 at 2:40 pm

1 akashic record on 08.01.20 at 12

The peaceful nature of that protest is commendable. Peaceful protests will always be effective than other types. Point taken.

However, in this case, it would be hard to gauge the general public’s overall consensus on the matter. This is because the other side, the side wearing masks and social distancing, is unlikely to have a group of strangers squeeze together in a mass protest in support of those same measures.

MF

#37 John on 08.01.20 at 2:41 pm

Thank you, Ryan, for such an informative article. I have a question: When you invest in the US (or other foreign countries), do you use currency hedging to avoid currency risk?

#38 Drinking on 08.01.20 at 2:52 pm

Good article today Ryan; we really do have it all in this country,well, besides tropical fruits. There is no reason as to why we could not be the richest, most innovative country on this planet but…….????

#39 ImGonnaBeSick on 08.01.20 at 3:00 pm

#24 Ryan Lewenza on 08.01.20 at 1:24 pm

If we decided tomorrow to put a moratorium on oil production in Canada to help combat climate change, the US, OPEC or Russia would just step in and replace those 4 to 5 million barrels. In this case, nothing would change for oil demand and consumption and all we would do is destroy AB and our economy and do nothing for addressing climate change. At the end of day its all about oil demand and until someone can tell me how we’re going to replace 100 mln bls/day of oil consumption, I see our world continuing to be carbon based and therefore we should try to profit from this. By profit I mean jobs, economic growth, Canadians overall well being and maintaining our high standard of living. I believe in climate change but I’m also a realist! – Ryan L

—-

Perfect response! I echo your sentiments here Ryan, I look forward to that article as well. Have a great long weekend.

#40 MF on 08.01.20 at 3:09 pm

2 dogman01 on 08.01.20 at 1:58

Those are individual companies. Individual companies will always run the risk of bankruptcy. That goes for our companies, American companies, Japanese ones and so on. Why didn’t you mention barrick gold, which has been around since 1983 as an example?

“Investing in Canada” is more about investing in broad based index funds, like the tsx.

By the way, it’s 31 Celsius in Toronto with no humidity and not a cloud in sight. Tons of people out and about. Smiles everywhere.

MF

#41 Shawn on 08.01.20 at 3:24 pm

Hi Ryan.

Interesting post. What’s more interesting is that at every point where the TSX dropped below 1.4X book value on your chart (with the exception of 2003) one was better off buying the S&P500 and/or Nasdaq despite higher valuations.

The TSX is cheap on a valuation basis but it is cheap for a reason. Companies like SHOP will continue to pull the TSX higher but as a general index one would simply be better off with the S&P500.

#42 Dirty Dan on 08.01.20 at 3:55 pm

#41 Shawn on 08.01.20 at 3:24 pm

The TSX is cheap on a valuation basis but it is cheap for a reason. Companies like SHOP will continue to pull the TSX higher but as a general index one would simply be better off with the S&P500.

Are you suggesting that buying a PRIVATE pipeline with government money, scrapping it and scarring away investment in the energy sector won’t give Canada woke credits? What is the exchange rate on woke to US$? Must be a lot as liberals are hoarding wokeness like it’s going out of style.

#43 Bill on 08.01.20 at 4:07 pm

#38 Drinking on 08.01.20 at 2:52 pm
Politicians are too busy controlling and robing us.
If any industry takes off they tax the hell out of it. As what happened in the oil boom.

#44 Yukon Elvis on 08.01.20 at 4:09 pm

#25 Penny Henny on 08.01.20 at 1:27 pm
Currently the TSX yields 3.5%, in large part due to the sweet 4% dividend yields offered by the big banks.-Ryan
////////////////

By my calculation the big 5 banks are currently yielding 5.68%
…………………….

I bought [email protected]$55 on Friday. It pays 6.54%. I use the DDD method. Buy the Dip and Drip the Divvy.

#45 Kilt on 08.01.20 at 4:11 pm

Hey Ryan.

I agree that there should be alternative pipelines rather than them all heading south. But, I think that time is past. Pipeline jobs are temporary. Tanker jobs don’t go to Canadians. Globally there is a glut of oil. Prices will be low for a long time and costly producers can survive on debt only for so long. Canada and Alberta’s future isn’t oil.

Fort Mac was a boom town because of growth, because of construction. That all ended 5+ years ago. It isn’t coming back.

Canada needs to wake up and get out the past. We have nearly 40 million people and the second largest country in the world. We are not “Small”. Lets get rid of our “resource exporter” nametag and start to invest in technology and manufacturing.

Jobs – how about a bullet train line from Calgary to Montreal. Infrastructure money to replace or repair all those old bridges. New bridges to the Island and highways up the coast. The country is so big we could have to tens of thousands of high paying infrastructure jobs for decades. Improve our federal and provincial parks and make Canada a tourist hot spot ready for when the pandemic is over.

I know. I’m dreaming.

Kilt.

#46 akashic record on 08.01.20 at 4:33 pm

#36 MF
From news updates, apparently there were counter-protesters, calling the protesters nazis. The police separated them, until they put an end of entire event, that accord to the organizers, attracted 1.3 million people. Police blamed the organizers for the need for wrapping up the protest, “as they could not comply with the health regulations” during the demonstrations.
A politician blamed the second wave already on the protest, although there was 995 case already in the previous 24 hours, the biggest increase since May.

#47 Stoph on 08.01.20 at 4:49 pm

#130 Jane24 on 08.01.20 at 8:01 am
My 18 year old student nephew and my 19 year old student niece, neither of who has ever done any paid work in their lives, both got the free Covid money. Neither has ever had this kind of money before. Having great fun now deciding what to waste it on. I still cannot believe that the Cdn govt did this.

—————————————————————–

One of the conditions of students receiving CESB funding if they aren’t working is that they are looking for, but cannot find work due to COVID-19 or that they cannot work due to COVID-19. Mind you I doubt that most people receiving the funding take these requirements seriously. The government should definitely follow up with people receiving funds to ensure that they are compliant.

https://www.canada.ca/en/revenue-agency/services/benefits/emergency-student-benefit/cesb-who-apply.html

#48 Inequity on 08.01.20 at 4:55 pm

#24 Ryan Lewenza

Well put Ryan, I couldn’t agree more.

#49 Ryan Lewenza on 08.01.20 at 5:00 pm

Victor V “Based on your analysis Ryan, it seems that now would be the right time to increase weighting to the TSX. What is your rationale for waiting…?“

The technicals. The S&P 500 remains in long-term relative strength uptrend vs the TSX. Despite the much better valuations, the reality is the S&P 500 remains the strongest global equity market so we stick with this trend until it changes. – Ryan L

#50 Drinking on 08.01.20 at 5:03 pm

#43 Bill

True, as well as special interest groups that do not seem to realize that it takes money to innovate!

#51 Ryan Lewenza on 08.01.20 at 5:08 pm

John “Thank you, Ryan, for such an informative article. I have a question: When you invest in the US (or other foreign countries), do you use currency hedging to avoid currency risk?“

Good question. Generally we do 1/2 hedged and 1/2 unhedged to the USD. If we didn’t we would have roughly 40% US dollars, which brings on too much currency risk. The hedged ETFs are more expensive but that’s the rub if we want to keep our USD exposure to 20%. – Ryan L

#52 Nonplused on 08.01.20 at 5:15 pm

#45 Kilt on 08.01.20 at 4:11 pm

“Canada needs to wake up and get out the past. We have nearly 40 million people and the second largest country in the world. We are not “Small”. Lets get rid of our “resource exporter” nametag and start to invest in technology and manufacturing.”

———————-

What, praytell, should Canada start manufacturing that we don’t already? And why would manufacturers locate in a high tax regime that is threatening even higher taxes like Canada when they can locate in Texas or China?

Fact is Canada is what it is because we export raw materials and farm goods. Without that Canada would be a very different place. We probably wouldn’t even be making cars by now if it wasn’t for the auto-pact.

My favorite hairbrained scheme is for Alberta to switch from exporting oil to exporting electricity made from wind. Aside from the prohibitive cost, who would we sell it to? BC? They have lots of hydro already. The US? Why wouldn’t they build their own windmills rather than have to build 1,000’s of miles of transmission lines?

The “invisible hand” tends to place production where it makes most sense economically. That isn’t going to be Canada. Heck we can’t even compete with Ikea and we have all the trees!

If the oil patch in Alberta dies, the whole country suffers with it. The royalties and taxes that the oil patch kicks off are a major portion of revenues even for Ottawa. And there are a great many “trickle down” jobs that would also disappear. For example Bombardier wouldn’t be selling so many skidoos and the price of cottage country in BC will crater. Even the banks will suffer as they do a lot of business with the oil patch.

The oil patch is the greatest gift Dog ever gave Canada. And the hypocrisy that has developed is incredible! BC doesn’t want a pipeline expansion, but they are happy to remove whole mountains and send the coal to China! Meanwhile the protesters drive to the protests in their petroleum powered cars and trucks wearing their petroleum based clothes and touting their petroleum funded “free” health care. It is unbelievable.

#53 Six Errors on 08.01.20 at 5:32 pm

1) missing the compounding effects of masks, 2) missing the nonlinearity of the probability of infection to viral exposures, 3) missing absence of evidence (of benefits of mask wearing) for evidence of absence (of benefits of mask wearing), 4) missing the point that people do not need governments to produce facial covering: they can make their own, 5) missing the compounding effects of statistical signals, 6) ignoring the Non-Aggression Principle by pseudolibertarians (masks are also to protect others from you; it’s a multiplicative process: every person you infect will infect others).

Credit: Nicolas Taleb

#54 Six Errors on 08.01.20 at 5:36 pm

PS forgot the link in case you want to see all the math:

https://medium.com/incerto/the-masks-masquerade-7de897b517b7

#55 Loonie Doctor on 08.01.20 at 5:37 pm

#12 JPN

Regarding tax efficiency of eligible dividends, you are asking the right question. The tax drag depends on the province, your tax bracket, and the yield itself. Total return also includes capital gains, but they can be deferred for years. So, when looking at tax efficiency, it is the annual tax drag from income that I use.

I made a portfolio building calculator that accounts for the tax drag by income level and province and uses the dividend yield from last year. Tries to tax optimize across different account types/balances and customizable asset allocation.

https://www.looniedoctor.ca/canadian-portfolio-builder-basic/

-LD

#56 Long-Time Lurker on 08.01.20 at 5:38 pm

Someone give Ryan a hug. He needs it.

As for me, I just fire off a few comments and run out the door.

Hey, Ryan:

iShares S&P/TSX Capped Consumer Staples Index ETF (XST.TO)

Toronto – Toronto Delayed Price. Currency in CAD

https://ca.finance.yahoo.com/quote/XST.TO

#57 Long-Time Lurker on 08.01.20 at 5:40 pm

>Jair Bolsonaro update. He’s taking antibiotics for a lung infection. His doctors haven’t linked it to his Covid illness. Bolsonaro isn’t out of the woods yet.

>What’s interesting is that Louie Gohmert is taking hydroxychloroquine, zinc and erythromycin (antibiotic) for his Covid illness. We can see if he fares better than Bolsonaro.

WORLD NEWS
JULY 31, 2020 / 9:58 AM / UPDATED A DAY AGO
Brazil’s Bolsonaro vows more travel despite ‘mold’ in lungs

Lisandra Paraguassu

BRASILIA (Reuters) – Brazilian President Jair Bolsonaro shook hands with a crowd of cheering supporters packed shoulder-to shoulder in a visit to the far south of the country on Friday, after revealing the night before that he is taking antibiotics for a lung infection.

Bolsonaro has previously tested positive three times for the coronavirus, but, according to one source, doctors accompanying him on the trip have not linked the lung infection to his recent bout with COVID-19…

…Having spent most of July in partial isolation at his official residence in Brasilia, Bolsonaro said on Saturday that his last coronavirus test was negative.

However, a week back into his normal schedule, the president said in his weekly live broadcast on Thursday that he had felt weak and exams had revealed an infection.

“I just had a blood test, you know, I had a little weakness yesterday, they even found a little bit of infection too. I’m on antibiotics now,” he said. “After 20 days indoors, I have other problems. I have mold in my lungs.”….

https://www.reuters.com/article/us-health-coronavirus-brazil-idUSKCN24W2MI

Rep. Louie Gohmert ‘all in’ on using hydroxychloroquine to treat COVID-19
By Emily Jacobs
July 30, 2020

…Speaking to Fox News Wednesday evening, Gohmert (R-Tx.) said that his doctor had prescribed him the medication — which scientific data has shown is ineffective in treating the disease — and would begin a regimen by the end of the week.

“My doctor and I are all in, and I got a text just before I came on from a dear friend, [a] doctor, who just found out he had it, and he said he started a HCQ [hydroxychloroquine] regimen, too,” the Texas Republican told the network.

Gohmert, 66, said his treatment will also include taking zinc and erythromycin, an antibiotic often taken as an alternative by people with allergies to penicillin….

https://nypost.com/2020/07/30/rep-louie-gohmert-to-use-hydroxychloroquine-to-treat-covid-19/

#58 Dr V on 08.01.20 at 6:43 pm

My one and only individual stock is a big five bank which I bought somewhere in the dip but not at the bottom – cant time it that well.

Just got the second distribution. I calculate just over 7% based on my purchase price. that will be tax free when I retire.

I think that rates a “tummy rub”.

#59 tccontrarian on 08.01.20 at 7:12 pm

“Another big positive for Canadian equities are their cheap valuations. Below I chart the TSX price-to-book ratio (P/B) and currently it’s trading near a 27-year low of 1.5x, well below the long-term average of 2.2x. In contrast, the S&P 500 trades at a high P/B ratio of 3.5x.” R

Time to overweight the TSX then, no?

” While we’re still bullish on the US equity markets and have a good weighting to the region, we are keeping a mindful eye on those elevated valuations.” R

What exactly do you mean “we are keeping a mindful eye”? When something is in the ‘elevated valuation’ category it’s either a ‘sell’, or sell short’ (that’s exactly what I am doing with those – and increasing my cash position).
I won’t be surprised with a 20-30% drop in the DOW/SPY by Christmas (or Easter, if things decide to take their sweet time). I mean, we just witnessed one of the most dramatic drops in history during Feb-Mar. Y’all think it’s ‘one-and-done’ type of deal? No no no mes amies…Mrs. Market ain’t done with us yet! She’s given generously last decade and now that rates have been at “0” ….forever, that trend is done.
Zombie entities will falter as rates are bound to increase, many jobs ain’t coming back, and Mrs. Market wants her pound of flesh.

tcc

#60 Sara on 08.01.20 at 7:17 pm

“Never, ever kowtow to a commenter’s whining.
Like a dog to a bone.
It sets a precedent.
And the dog will still keep growling for more bones.”

And your reason for wasting time on someone else’s blog is?

#61 Flop... on 08.01.20 at 7:32 pm

So my hack investment move was this week to sell half of my precious metals fund and a third of my global tech fund.

This was placed in a boring balanced index fund.

Also decided to inject some new funds to buy a fund which contains North American Financial Companies.

Lots of Canada’s top banks contained, but also some Berkshire Hathaway, JP Morgan and some Marsh and McLennan.

Marsh and McLennan sounds like the name of a whiskey product to me, but I discovered through a recent howmuch article they are the top insurance company by revenue, 7.5billion in the U.S…

M46BC

Top 10 Largest Business Insurance Brokerages by Revenue.

Company Brokerage Revenue ($)

1. Marsh & McLennan Cos. Inc. $7.5B
2. Aon PLC $4.7B
3. Willis Towers Watson PLC $4B
4. Arthur J. Gallagher & Co. $3.6B
5. BB&T Insurance Holdings Inc. $2B
6. Brown & Brown Inc. $2B
7. Hub International Ltd. $1.7B
8. USI Insurance Services LLC $1.7B
9. Alliant Insurance Services Inc. $1.3B
10. Acrisure LLC

#62 crowdedelevatorfartz on 08.01.20 at 7:52 pm

@#42 Dirty Dan
“Are you suggesting that buying a PRIVATE pipeline with government money, scrapping it and scarring away investment….
+++

I have never seen “scarred” investments.

Do you do that with a branding iron? A whip? A Razor?

and your final comment had me confused….

“Must be a lot as liberals are hoarding wokeness like it’s going out of style.”

What is wokeness?
I cant find it anywhere but the Lord of the Rings and it involves a spell………

#63 Do we have all the facts on 08.01.20 at 7:57 pm

In January the CREA anticipated that 520,000 home sales in Canada would occur in 2020, at an average of 43,335 sales per month.

In the first six months of 2020 213,480 home sales were recorded, an average of 35,580 sales per month. CMHC has analyzed market conditions for the balance of 2020 and has projected a maximum of 420,000 home sales for 2020.

The financial impact of 100,000 fewer home sales than originally projected for 2020 seems to have been ignored by the media and financial analysts.

In addition to a possible 20% drop in residential home sales the leasing of space in newly completed office buildings has slowed down as potential tenants wait for the fallout from Covid 19 to reconfigure the market place.

Nearly every major retail complex in Canada experienced an increase in vacancies as thousands of outlets were permanently closed.

The impact of Covid 19 will be felt by every form of REIT across Canada and it may take year’s to return to normal vacancy rates.

Both residential and commercial construction will decline in 2019 and 2020 adding to unemployment.

The automobile and auto parts industry represented 26% of our manufacturing sector in 2919 and had declined in importance in recent years. The major portion of our manufactured exports are purchased by the United States and the value has continued to decline with each passing year.

I could go on but my main point is that the future of the Canadian economy does not appear to be as rosy as many analysts are predicting.

I would appreciate a detailed explanation of where growth of an economy based on domestic consumption might grow in 2020 and 2021 if the unemployment rate remains above 7.0% and all levels of government raise taxes and user fees to continue operations.

I examined every major contributor to Canadian GDP in 2019 and with the exception of the health and social services sector saw very little potential for significant growth. Even the financial services sector seemed to preparing for an increase in loan defaults and a significant reduction in funding for major capital projects.

I would like nothing more than to be proven wrong.

#64 Joseph R. on 08.01.20 at 8:06 pm

#46 akashic record on 08.01.20 at 4:33 pm
#36 MF
From news updates, apparently there were counter-protesters, calling the protesters nazis. The police separated them, until they put an end of entire event, that accord to the organizers, attracted 1.3 million people. Police blamed the organizers for the need for wrapping up the protest, “as they could not comply with the health regulations” during the demonstrations.
A politician blamed the second wave already on the protest, although there was 995 case already in the previous 24 hours, the biggest increase since May.

————————————————————-

There is a joke about hell is where the cops are German…
No tear gas used, no signs of baton hits on protesters, simply cops protecting both groups from clashing. We can learn from the Germans.

That said, history shows there is a high chance of innocent people dying days after Germans marches in streets.

#65 Drinking on 08.01.20 at 8:38 pm

#61 Flop…

Thanks!

#66 DON on 08.01.20 at 8:38 pm

Thanks for the analysis Ryan. Good to be a realist.

@Do we have all the facts.

Nicely put. No one wants to think about the hidden consequences. Canada is tied to the US, we are in the same roller coaster. We’re in the back seat.

#67 willworkforpickles on 08.01.20 at 8:53 pm

Mills starting at the bottom working their way up will have to learn to expertly navigate through the steaming jungle of lies and booby traps over the next 10 years if any want to come out on top.

#68 TrendIsYourFriend on 08.01.20 at 9:20 pm

Investing in TSX vs S&P is like GICs vs ETFs, don’t understand why anyone would trash you for playing S&P. That’s where all beard-wearing, real man put their (and customers’) money to work.

Now, as with any chart and trend, time will come when the relative performance of TSX will get a bump. Soon. Oil, miners, fins will get some love as we get that sector rotation. Unless we all keep buying new iphones and Win and what not every few months.

#69 Interstellar Old Yeller on 08.01.20 at 9:53 pm

Great post, Ryan, informative and easy to understand!

Have a great long weekend!

#70 whiplash on 08.02.20 at 12:07 am

#45 Kilt

……………But, I think that time has past………………

Speaking of time, 2015, change in federal government, Northern Gateway cancelled, federal government introduces massive new regulations for Energy East, it now becomes uneconomical to build, Bill C-69 is introduced killing any prospect of any major infrastructure being built includes the “gender diversity/social clause!!, government introduces oil tanker moratorium so much for oil being shipped to new markets, carbon tax’s will give our competition a 25% advantage, and for large companies that can’t secure financing from banks or private lenders the good old Liberal government to the rescue, only catch they have to sign on to the Paris Accord Agreement.

Could this be by chance why the Ontario Teacher’s Pension Fund has invested in the Abu Dhabi National Oil Company to fund their massive fossil fuel infrastructure in the middle east because maybe some thing can be built!!

#71 Mark on 08.02.20 at 12:31 am

Some good points but you may also be missing the forest for the trees. How can the Canadian economy keep up when Canadians have such insane debt levels and a government that does everything it can to keep the debt circus going?

#72 Penny Dergus on 08.02.20 at 1:58 am

Its a sure bet that Canada will continue to collapse as long as Trudeau is doing the bidding of foreign competitors and hate groups who see him as an easy mark.

If you think that cannabis, condos and debt will drive our economy forward you’re an idiot. Mining and energy, services and manufacturing all dying. Once upon a time Canada was a driving force exporting technology and expertise.

https://financialpost.com/news/economy/ottawa-create-benefit-gig-contract-workers-cerb-winds-down/wcm/97f99020-9f4a-4775-bed3-817ba5e1b6ed/

Bet on 100% taxation if Trudeau wins another election. Bet on confiscation. The last industry to hollow out is your life savings.

#73 Upenuff on 08.02.20 at 2:48 am

Said it before and I will say it again, I wait with anticipation to read Ryan’s weekend blogs, inciteful and easy to understand and read!

Thanks again Ryan.

#74 Chaz Seattle on 08.02.20 at 3:57 am

Don’t you just love the CERB news and the magical economic recovery reports announced just hours after Trudeau was evicerated in a puddle of his own own puke? Is it all just a co-inky-dink? Wait, a unicorn just landed in the yard.

#75 crowdedelevatorfartz on 08.02.20 at 9:07 am

@#67 Will work for Shekles
“……learn to expertly navigate through the steaming jungle of lies and booby traps over the next 10 years if any want to come out on top….”

++++

You expect the Liberals to be in power for another 10 years ????

#76 crowdedelevatorfartz on 08.02.20 at 9:14 am

@#74 Chaz Bono lives in Seattle?

“Don’t you just love the CERB news and the magical economic recovery reports announced just hours after Trudeau was eviscerated….”

+++++

Oh I’m sure the Liberal spin doctors were quite happy Trudeau’s question and answer charade was on a Summer Thursday before a Long weekend….

WE voter viewership virtually vanished.

As for the unicorns?
Liberals produce those every time they open the taxpayer funded cheque book.

#77 Dharma Bum on 08.02.20 at 10:12 am

#30 PBrasseur

Canada is behind because it’s a socialist mess plagued with corrupt oligarchies. And that’s not a about to change.
——————————————————————–

Add in a corrupt, lying, virtue signalling, incompetent, egotistical, cowardly, pseudo-feminist, costume donning, trust fund sucking, fake woke, pandering, ethically challenged, oil industry hating, welfare giving, smarmy, smirking, arrogant, entitled, misguided, hypocritical, vote buying, thieving prime minister, and Bob’s your uncle!

#78 Do we have all the facts on 08.02.20 at 10:23 am

I might becoming overly cynical but creating a program that provides EI benefits to individuals who reported modest income from ‘gigs’ looks a little like a Federally run social assistance program to me.

It took a Constitutional amendment in 1940 to give the Federal government full control over EI and it now looks like our current Prime Minister intends to expand Federal jurisdiction without any form of consultation with Provincial and Territorial governments.

In recent years all Provincial governments have converted a substantial portion of their social assistance funding to support employment, training and economic development initiatives. The employment based initiatives developed by Provincial governments are the primary reason the unemployment rate in Canada declined in recent years.

The recent proposal by the Federal government to convert CERB into a form of EI will definitely undermine efforts to expand Provincial economies through increased employment. There is no indication that the Federal government has the slightest interest in development of Provincial or Territorial economies.

Surely someone in Canada can recognize a politically based power grab by the Government of Canada for what it is. An effort to curry favour with additional Canadian voters at any cost.

When will this vanity end?

#79 MF on 08.02.20 at 10:46 am

#63 Do we have all the facts on 08.01.20 at 7:57 pm

“I would like nothing more than to be proven wrong.”

-That’s usually pretty easy for your posts.

The concept is pretty simple. If you are referring to Garth’s posit that the Canadian economy will outperform the US one in the near term the argument was based on two premises:

-Social strife down south caused by the looming election
-Coronavirus cases continuing to rise.

Both of these elements are either muted or absent in Canadian society. So, it can be predicted, that if our reopening continues to go better than the American one, our economy will emerge from the crisis quicker and we will reach unemployment levels seen prior to the crisis quicker.

The second argument was put fourth by Ryan. He mentioned the TSX was composed of a heavy weighting of resource stocks, which are cyclical. He evidenced that point by showing the TSX seems to reach a “magical” level before it rises again. So, we can assume, that the TSX will have periods of outperformance in the future as the resource sector comes into favour again (see oil’s rise in the past few months).

Finally Ryan mentioned valuation. The s and p is more overvalued than the TSX, making the TSX more competitive.

Again, not hard to undertand these concepts.

MF

#80 MF on 08.02.20 at 11:06 am

#78 Do we have all the facts on 08.02.20 at 10:23 am

The program was just announced last week, with 0% details. All we know is how it will be transitional from CERB, and be for people who might have trouble qualifying for classic EI. Like you said,

That’s it. The rest of your post is 100% conjecture.

“I might becoming overly cynical”

-Clearly.

MF

#81 willworkforpickles on 08.02.20 at 11:14 am

#77…”Add in a corrupt, lying, virtue signalling, incompetent, egotistical, cowardly, pseudo-feminist, costume donning, trust fund sucking, fake woke, pandering, ethically challenged, oil industry hating, welfare giving, smarmy, smirking, arrogant, entitled, misguided, hypocritical, vote buying, thieving prime minister, and Bob’s your uncle!”
…………………………………………………………………………………………………
More CERB More games More fun More toys Oh Boy!

#82 Do we have all the facts on 08.02.20 at 11:20 am

#79 MF

Why start with an insult! Very immature!

I wasn’t referring to the stock markets I was referring to potential growth of the Canadian economy on a sector by sector basis. There appears to be weakness in the majority of major contributors to Canadian GDP and that was a cause of concern. The stock markets can only hide the true health of the Canadian economy for so long before reality sinks in.

Canada is driven by domestic consumption and lately a great deal of disposable income is being generated by government debt. Hardly an indicator of economic health.

#83 willworkforpickles on 08.02.20 at 11:36 am

Even though i own a few stocks that make a bit of money each qtr…I hate and despise the stock market like no other human being alive.

#84 Sail Away on 08.02.20 at 11:54 am

#83 willworkforpickles on 08.02.20 at 11:36 am

Even though i own a few stocks that make a bit of money each qtr…I hate and despise the stock market like no other human being alive.

—————-

Wow.

One of my dogs used to hate and despise a strangely-shaped black rock on the beach… until I started hiding bits of hot dog and cheese around it. Now it has become the Giving Rock and is approached with joyous anticipation.

#85 Ronaldo on 08.02.20 at 12:18 pm

#78 Do we have all the facts on 08.02.20 at 10:23 am

He is certainly not letting a good crisis go to waste is he?
We are so hooped.

#86 Mr Canada on 08.02.20 at 3:42 pm

I have zero confidence in T2 and his fiscal policies. I switched to US equities in late 2016 denominated in US $ and have not looked back. Sure Canadian Banks pay a great yield of 5%. But TD Bank 3 year total return with Dividends reinvested is a paltry 2.9% — YTD loss on TD is 30% – glad I used the money to buy Apple and Microsoft…

#87 Ordinary Blog Dog on 08.03.20 at 11:57 am

Ryan, very nice post – thanks. Just read it today.

#88 Steven Rowlandson on 08.03.20 at 12:48 pm

I have no doubt that the real estate insanity would continue even if all jobs and income disappeared and if all forms of currency disappeared. The sense of entitlement held by home owners, investors and realtors is invincible. It would take the creation and enforcement of a law banning home prices and rents for ever and ever on pain of death for genocide to correct their bad behavior.