I occasionally field questions regarding the performance of the Canadian stock market under different political regimes.
Similar to the misjudged narrative in the U.S that the stock market prefers a Republican president, it appears that the returns of the Canadian equity market have historically been higher under Liberal prime ministers than Conservative leaders.
Since 1926, the Liberals have spent ~64 years in power (with a median cycle of ~7 years), compared to ~31 years for the Conservatives (with a median cycle of ~6 years).
During the Liberals’ tenures, the TSX delivered median annualized price returns of 5.4 per cent, compared to 3.4 per cent during the Conservatives’ time in power.
The seeming performance edge of the TSX under the Liberals, however, can be largely attributed to factors beyond the government’s control. For instance, the stellar performance of the resource-heavy TSX during the Liberal’s tenure between 2003 and 2006 was driven primarily by the powerful commodities bull market in the 2000s, courtesy of a rapid growth period in China, and had little to do with domestic Canadian policy.
Meanwhile, the relatively weaker returns recorded by the TSX during the Conservatives’ tenure between 2006 and 2015 overlapped a global financial crisis (2007-09) that ripped across the world and produced one of the worst equity bear markets in history that took several years to fully recover.
Although the historical data seem to suggest that Liberal prime ministers have been “friendlier” to the performance of Canadian equities, I would suggest that investors should keep political distractions out of their portfolios. The adage “correlation does not equal causation” applies in this instance.
The prime minister does not have a major influence on the performance of the TSX, as timing, luck and prevailing global macro circumstances were clearly key factors that contributed to the seemingly lopsided outcomes I mentioned above.
Ultimately, economic and corporate earnings fundamentals, together with valuations, have much greater explanatory power for stock market returns over the medium and long term. In the case of the TSX – which is heavily weighted towards the Financials, Energy, Industrials, and Materials sectors to the tune of just over 65 per cent of the index – factors such as U.S. and global growth conditions, commodity prices and domestic household spending outlook are far more influential drivers of performance than the prime minister’s political party affiliation.
For investors, there are two key takeaways. First, investors should resist the impulse to make significant portfolio adjustments based solely on political events. And second, as always, investors should keep their attention squarely focused on economic and corporate profit fundamentals, which are more crucial fundamental drivers of equities than which political party is in power.
Mike Candeloro, vice-president, portfolio manager and wealth advisor with RBC Dominion Securities and the head of The Mike Candeloro Wealth Management Group, supplied this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Member CIPF. Mike can be reached at www.michaelcandeloro.com