About 8 years ago, on September 30, 2010, the TSX Index closed at 12,369. As I write today it is at 16,217, a gain of 31.1% or 3.44% per year compounded over the period. Add in dividends and the gain per year is around 6%. Not horrible, and certainly better than bonds, which yielded less than 2% over the same time span. However, when we look at the performance of the main U.S. index, the S&P 500, we start to understand how poorly the Canadian stock market has performed.
On September 30, 2010, the S&P 500 closed at 1,141. Today it is at a record high of 2,932, a gain of 157% or 12.52% per year compounded. Again, adding dividends, we get to a yearly gain of just around 15%, or better than twice that of the TSX. The difference in percentage points is hard to absorb, so let’s look at an example (no currency changes taken into account):
- $10,000 invested in the TSX on Sept. 30, 2010 would have grown to $13,110 today;
- $10,000 invested in the S&P 500 on the same date would have grown to $25,700 today.
That’s a big difference over a significant period of time. It is also a complete turnaround from the period of 2001 to 2007. In that span the TSX was the big winner, doubling in value while the S&P went up about 50%. What happened? Why has Canada underperformed so badly? The answer, in a nutshell, is that technology did well and commodities did badly. Here is a graph of the world commodity index over the past ten years:
The value of this basket of energy, materials and consumable commodities has dropped by almost half in the period we are looking at, and by three-quarters from its peak. Much of the TSX Index is made up of companies that produce and sell commodities, and the shares of most of these companies have performed in accordance with the prices for their goods; that is to say, very badly indeed.
In contrast, as is well known, over the past ten years the dominant sector in the S&P 500 has been technology and, in particular, the very large global technology companies that include Facebook, Apple, Google (Alphabet), Amazon, and Netflix, collectively known as the FAANG stocks. While commodity prices have tanked, the value of these companies has soared, famously making Apple and Amazon the first firms ever to have a market value of over $1 trillion.