Stock market: over 100 years, would it have been better to invest in Canada or the United States?

GUEST BLOG. I thank SA for the following question: “I once saw a poster of a 100-year stock index (can’t remember which one) in a bank and the chart was still going up. I would like to know, if we take all the Canadian securities over a 100-year period, what the graph would be. I think it wouldn’t be very handsome. Does it exist?“

The chart you saw is probably the US S&P 500 Index and it should look like this

which displays the performance of this index from December 30, 1927 to today:

(Source: Bloomberg)

Your question is very relevant: would the Canadian index, the S & P / TSX or formerly the TSE 300, display a graph similar to that of the S&P 500?First, I would mention that, as is the case with many phenomena, our perception of reality is often distorted through the psychological bias called ‘recency bias’ (‘recency bias

That our brain favors the recent trend at the expense of the historical trend. However, recent stock market experience would certainly favor the US stock market over the Canadian market.

Indeed, since 2010, the US stock market has outrageously dominated the Canadian market. From January 1, 2010 to present, the S&P 500 Total (including dividends) recorded an annual compound return of 14.47% compared to 7.80% for the S & P / TSX Total (including dividends) during the same period . In my opinion, this is the reason why, when I talk to investors, most of them say they prefer US stocks. SA’s question seems to reflect the same presumption.

But does this perception hold up over a very long period of time?

Here is a comparable chart for the Canadian index:

(Source: Bloomberg)

At first glance, this chart looks strangely like that of the S&P 500.

However, most very long-term stock index charts will be impressive. If one uses a long enough period and a positive growth rate, the phenomenon of compound interest will invariably result in a curve that looks like a hockey stick!

That’s why it’s best to use a chart that uses a logarithmic scale, which essentially eliminates the impact of compound interest and the hockey stick curve. Here are the two previous graphs juxtaposed and using a logarithmic scale:

This graph seems to demonstrate that the “outperformance” of the American market is a rather recent phenomenon.

While it is easy to analyze charts, I believe it is much better to stick to the numbers when comparing the past performance of various stock markets. And, in this regard, nothing beats annual compound returns! Here are the annual compound returns of the two indices since December 30, 1927:

S&P 500: 6.05%

S & P / TSX: 4.93%

The performance of the American market has thus exceeded that of the Canadian market over the past 94 years or so.

That said, take note that these indices do not take dividends into account. For the S&P 500, the dividend yield has averaged 3.75% since 1927, bringing the total index return to nearly 9.80%. I have not been able to find the equivalent data for the Canadian index, but I suspect that it is similar (if not a little higher, due to the heavy weighting of banks in the index) to that of the market American. One might estimate that the annual compound total return of the Canadian market since 1927 has been close to 8.9%. Either way, these returns are attractive and would have been even higher had it not been for the Great Depression of the 1930s.

I personally believe that the difference in long-term returns is a result of the relative heavy weighting of the Canadian market in natural resource stocks.

This small unscientific study confirms in my opinion the attractiveness of the US market in the long term for the Canadian investor. At the same time, we must admit that the historic performance of the Canadian market is far from being stung!

Philippe Le Blanc, CFA, MBA

Chief Investment Officer, COTE 100