People walk past the TMX in Toronto, on Nov. 1, 2023.Chris Young/The Canadian Press
The Canadian stock market has an economy problem.
Over the past year, the TSX has deeply underperformed U.S. stock benchmarks, closely tracking the widening gap between the two countries’ economic growth readings. On both fronts, Canada is growing at about one-third the U.S. pace.
That’s no coincidence. The same failings sapping the Canadian economy of its vigour are also to blame for the run of shoddy performance in domestic stocks.
At the heart of Canada’s economic and stock-market mediocrity is a lack of private-sector investment.
For years, Canadian businesses have been loath to invest in things such as machinery and equipment, or productivity-enhancing research and development. Spending on those items has even started to decline in recent years.
“These are fundamentally important factors for equities,” Robert Kavcic, senior economist at BMO, wrote in a note to clients. “They drive earnings growth while also absorbing inflation, and they are right now tilted well in the U.S. direction.”
Canada’s growth problem is quickly becoming a matter of national urgency. Economists and business leaders speak of serious risks to Canadian prosperity from falling standards of living and declining competitiveness.
Real GDP per capita today has dropped back to 2014 levels. Some interpret this as a lost decade for Canadian living standards. And labour productivity has declined for three straight years – the worst run in at least four decades.
The only remedy is private investment, Stéfane Marion, chief economist and strategist at National Bank Financial, said in a recent report. “Private investment is the lifeblood of any economy.” It’s pretty important for the stock market, too.
A growing body of research suggests that R&D is especially crucial to stock returns. Which is a shame, because few in Canada appear to be doing very much of it.
A study released last July from Boston Consulting Group’s Centre for Canada’s Future ranked Canada second to last in R&D spending among 15 developed economies.
At about $700 per person, Canada’s R&D investment amounted to about one-third of U.S. levels.
The private-sector numbers are even worse, since about half of Canada’s contribution to R&D comes from governments and postsecondary institutions. Factor them out, and U.S. businesses are spending four times more on R&D than their Canadian counterparts.
Could this help explain why the U.S. stock market has left the TSX in its dust for more than a decade? A number of recent studies on the matter have come to a similar conclusion: Companies that invest more in R&D also tend to generate higher stock returns.
There are lots of technical reasons why this might be the case. One leading explanation is that the market misprices R&D intensive stocks based on how intangible assets are treated in financial statements.
Some studies also point to the role of intangible assets in the disappointing performance of value-investing strategies for several years now. And since the TSX is loaded with value stocks, it’s entirely possible that the Canadian market is being penalized for its limitations in R&D and innovation.
To be fair, the TSX has more problems than just R&D. It suffers for its relatively heavy weighting in sectors that are sensitive to higher interest rates, like utilities, real estate and telecoms. And it is light in the tech, communications and consumer discretionary sectors that have fuelled the biggest gains in U.S. stocks.
But it is becoming increasingly clear that the weaknesses in the Canadian stock market and the real economy are one and the same.
The resurgence in private investment needed to reverse the trends on either front, however, may continue to be elusive.
“It’s hard to revive business investment and productivity in Canada when foreign and domestic investors prefer to place their assets outside our borders,” Mr. Marion said.
Last year saw foreign investors sell a net $49-billion of Canadian stocks, while Canadian investors piled into international stocks. The combined net outflow amounted to 2.2 per cent of GDP – the worst result on record outside of a recession.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
