Market commentators were ebullient last week on the outdated news that Canada’s May GDP estimate was .6% versus the .2% projected by the consensus. Here is a chart of the last 6 months.
The driver? Oil and gas extraction increased 7.6% on a snapback following the oil sands fire of last May and another that knocked a major Syncrude upgrader offline earlier this year. Of course, the world has high inventories of oil and lots of capacity today, so pumping out more from the oil sands is likely to help keep prices lower for longer…not great for joyful revenue targets.
Manufacturing by comparison grew 1.1% in May, while construction declined 0.6% and real estate, rental and leasing shrank by 0.2%.
Most importantly, with the Bank of Canada hiking into the consumer debt storm in July, and the US Fed not, the Loonie bounced 10% against the Greenback since April. With Canadian households buried in debt and the red hot realty sector bleeding at the moment, export hopes to our largest trading partner are up for revision. All the while, the long-always, sell-side army is pumping up its earnings targets for Canadian companies. Spoiler alert: they did the exact same thing in 2007-08 as captured in this article from 2008.
What happened next should be seared in the memory of everyone with some savings to lose. This chart shows the Canadian stock index (TSX) since 2007, today back below the cyclical peak reached 9 years ago in July 2008.
A run-of-the-mill bear market decline of 25% from here would take the Canadian market all the way back to where it was at its secular top in 2000—17 years ago! That’s what happens when we ignore valuations: lots of risk and wild capital swings, with no rewards to show for it. Irrational valuations create secular bears that persist until mean reversion takes prices back to attractive investment prospects once more. Facts must be faced.
We cannot compound returns when capital looses big chunks and takes years to grow back again. This is not investing, its Russian roulette. Blind faith in the financial sales force will get you pain and suffering every time. The price we pay is the most defining feature of investment returns over time. History promises us that better prices are coming for those who can wait.