I've always had a fascination with market cycles and how to identify when you're at the peak or trough of a cycle. I decided to compare the market returns between the Tsx and S&P 500 from their peaks just prior to the GfC to current levels. Around the middle of 2008, and October of 2007, the Tsx and S&P 500 reaches their respective peaks.
If you invested in the Tsx index at the market peak prior to the GfC, your compounded annual returns over the next 15-16 years is only around 2%!!! On the flip side, if you invested in the S&P 500 at the peak in October of 2007, your annual compound rate is 8% which is significantly above Canadian equities.
Now I'm a believer that stock market returns mean revert over time and that an underperformance in one year could lead to an outperformance the following year. It is also true that Canadian stocks is heavily concentrated in energy and financials. The following question I ask is, can we expect a similar underperformance over the next 10-20 years in Canada relative to the US? I personally don't think so as US equities are getting back to frothy levels all over again. Moreover, the majority of the S&P 500 returns in 2023 came from just a handful of companies and that can't repeat indefinitely.
It is clear to me that Canadian equities is already pricing in a recession in Canada as valuations are very cheap. Are US stock investors a little too optimistic about the economy?
What do you think?