The S&P 500 stock index was up 8.8 per cent for the year through mid-March, right in line with the 29-per-cent return last year and the five-year average annual return of 13.4 per cent.
How great are U.S. stocks? Returns in the Canadian market tell the story. The S&P/TSX Composite Index was up 4.7 per cent year-to-date, last year’s gain was 9.2 per cent and the annualized five-year return was 9.3 per cent.
Now for some historical context that seems pretty important right now, given how much U.S. stocks have soared and the degree to which tech stocks have led the way. Roughly 25 years ago, a tech-led stock market boom exploded and U.S. stocks fell into a deep, long slump.
I was reminded of the dark days for U.S. stocks recently while looking at returns for the iShares Core S&P 500 Index ETF (CAD-Hedged), an exchange-traded fund that tracks the S&P 500 and uses currency hedging to screen out fluctuations between the Canadian and U.S. dollars. This ETF – the ticker symbol is XSP – has delivered an annualized return of 5.6 per cent since inception on May 24, 2001.
XSP made its debut during a multiyear pullback for U.S. stocks and then had to contend with the global financial crisis in 2008. U.S. stocks have pulled off some spectacular years since then, including five of them with gains of 20 per cent or more. But the long-term perspective is a reminder that the U.S. market hasn’t always been a machine producing double-digit returns.
The S&P 500 today is dominated by the Magnificent Seven tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – that together account for roughly 30 per cent of the whole. The Canadian stock market’s tech weighting is 8.7 per cent, a reminder that the S&P/TSX Composite Index is still very much a financials and resources proposition. Financials, energy and materials make up close to 60 per cent of the index.
Sometimes, the Canadian market mix overachieves compared with the S&P 500. If you look at the 10 years to Dec. 31, 2012, the S&P/TSX Composite Index had an annualized 10-year return of 9.2 per cent while the S&P 500 made just 3.2 per cent.
Enjoy the massive returns the U.S. market is providing today, but prepare for it to end in a potentially nasty way. It’s happened before.
Rob Carrick