If you’re wondering why everyone is making such a big deal about Mark Carney leaving the Bank of Canada for the Bank of England, don’t worry: His departure won’t make a whiff of difference to your investment portfolio.
That’s right, the greatest central banker in the world – by some accounts – means almost nothing to the market, which is far more concerned with events outside of Canada’s control.
On Monday, markets more-or-less shrugged over the surprising news of Mr. Carney’s upcoming departure after serving as Bank of Canada Governor for nearly five years.
Canada’s S&P/TSX composite index fell 0.2 per cent, which was in line with declines in other markets, including the United States, Britain and Germany.
And even though the head of the central bank does have tremendous influence over interest rates – and rates can move bonds in a big way – the bond market also reacted with a collective who-cares: The yield on the Bank of Canada two-year bond fell 1.6 basis points, sending prices up a touch.
As for the Canadian dollar, it fell slightly against the U.S. currency, but it often does when global stock markets decline and investors turn to the perceived safety of the greenback.
But let’s take a look at the stock market’s performance during Mr. Carney’s entire term as governor, to get a better sense of how Canadian stocks reacted to the monetary policy that steered Canada through the financial crisis and into the tentative economic recovery – and put Mr. Carney at the top of the world’s oldest central bank.
Before taking dividends into account, the S&P/TSX composite index fell 8.7 per cent during Mr. Carney’s term, underperforming the S&P 500 by more than nine percentage points.
Now let’s compare. Under David Dodge, who served as governor from 2001 to 2008, the Canadian benchmark index rose 41 per cent. And under Gordon Thiessen, governor from 1994 to 2001, the index surged 105 per cent.
By this yardstick, Mr. Carney has been no friend to equity investors.
Yet, it is important to put the role of governor into perspective: While the central bank sets interest rates and can be held responsible for some degree of Canadian economic performance, the stock market is largely beyond its domain.
In the case of the S&P/TSX composite index, about half is composed of commodity producers – which take their marching orders from the price of crude oil, natural gas, gold, copper and potash. These resources are sensitive to moves by central banks in the United States and China – but not Canada.
Financials are another big part of the market, and it is true that Canadian banks have become the envy of the world because of their relative stability during the financial crisis. That stability has helped Mr. Carney’s profile.
However, he is leaving the Bank of Canada at a time when low interest rates have driven Canadian consumer debt levels to record highs, threatening the housing market. A nasty correction in house prices, which some observers are anticipating, certainly isn’t going to help Canadian bank stocks, which have been drifting sideways for more than two-and-a-half years. Would Mr. Carney be able to save the day if he stayed governor? Perhaps. But any big rally is going to need the help of real market movers. Ben Bernanke, over to you.