The connection between economic news and the stock market

Maybe Jerry Lee Lewis was singing about the current investment landscape. Look around and you’ll see there is indeed a whole lotta shakin’ goin’ on.

The global economy is on a roll
Canada is booming
Interest rates are rising, as are Canadian bond yields are rising
The loonie is on the move, up 13% in four months against the U.S. dollar
Our trade relationship is being renegotiated with U.S. and Mexico
Weather-related disasters in the U.S. and the Caribbean are devastating
Brexit negotiations are creeping along
And Amazon is steadily taking over the world

I’m sure I missed some obvious ones. The point is, there are a lot of moving parts right now.

With this heightened activity has come a number of reports and articles lamenting that the Canadian stock market is not reflecting all the good news. The S&P/TSX Composite index is flat on the year (including dividends), while markets around the world are doing well. You might be asking, what am I missing?

Stock markets and the economy

But really, there’s no mystery here. The connection between current economic news and the stock market is tenuous at best. In fact, it’s almost a fluke when the two are moving together.

There are a number of reasons for this.

First there are many forces that impact stock prices that have nothing to do with what’s being covered by the media.

Second, what’s happening today is old news. Yes, the pace of economic growth impacts corporate profits, which in turn drives stock prices, but Mr. Market is looking ahead 12-18 months. He’s anticipating what he’ll be reading then. In other words, the market discounts future earnings and dividends. There are many illustrations of this, but a recent one came in the period from 2012 to 2014. The economic news was pretty bleak through that period, but markets roared ahead. While people obsessed about gridlock in Washington, a chronic recession in Europe and a slowdown in China, it was a great time to be an investor.

Thrid, even if stock markets did move in sync with the economy (I repeat, they don’t), the Canadian market would still diverge. That’s because the S&P/TSX Composite Index is not at all reflective of the makeup of the Canadian economy. The economy is consumer-driven, while the index is dominated by natural resources and financial services. It’s like comparing apples and oranges.

Lastly, and for sure, the Canadian economy looks nothing like a properly diversified portfolio. Consider our Founders Fund at Steadyhand. Of the 56% allocation to stocks, 29% is in foreign-based companies. Of the 27% that are headquartered here, only half are dependent on the Canadian economy (banks, utilities, telecoms, grocers). The rest are global in nature and have little domestic revenue.

Canada is on a roll. Job growth is strong. Car and house sales are near cyclical peaks. Interest rates are normalizing. And selfishly, my trips to California are going to cost me less this winter. It’s a beautiful thing. But…don’t confuse an improving standard of living with what’s going on in your portfolio. It’s normal, not mysterious, for them to be out of sync.

Tom Bradley is president and founder of Steadyhand Investment Funds Inc.

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