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October 3, 2019 | Late Cycle Credit Risks Loom Large for Canada’s Stock Market

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

Canada’s TSX stock index (which most Canadian funds and managers are designed to track up and down) peaked in September of the 1990 to 2000 expansion cycle. Then it crashed 50% over the next two years, recovered into June 2008, and crashed 50% a second time in the 2008-09 cycle.  Though it rebounded into 2014, it’s had violent fits and starts since and has only managed to eke out a nominal capital gain of 1.95% annually over the last 19 years. A run-of-the-mill bear market loss of just 28% from here would return the TSX to its September 2000 top once more, and mark 20 years of a wild ride and zero capital gains.

Such is the secular bear game of snakes and ladders that we buy into from record valuations (knowingly or not).

Weighing in at 32%, Canadian financial companies are, by far, the most defining sector in the TSX.  That’s risky concentration at the best of times, but especially coming off a ten-year expansion cycle during which earnings multiples have leapt, and Canadian households and businesses have taken on world-famous indebtedness.

As shown in my partner Cory Venable’s ex-dividend chart below since 2002, financials (in blue) led the TSX (red) into the 2008 peak and 2009 bottom, then recovered and have remained range-bound since 2018 even as the TSX made a marginal new high in September.

In the sell-off over the last two days, financials have led, falling nearly a percent more than the TSX overall.

With defaults and insolvencies coming from below-average levels over the past decade and now rising across the country in both businesses and households, the banks are due for a ‘normalized’ period of higher losses.  Years of quantitative easing extended the multiple expansion-debt-addition phase, and also magnified the bear market now looming for bank shares, the TSX, managers, funds and all the ETFs that track it.

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October 3rd, 2019

Posted In: Juggling Dynamite

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