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BMO senior economist Robert Kavcic has detailed the stark underperformance of the Canadian economy and stock market relative to the United States in his weekly column. Domestic investors can be forgiven a degree of trepidation when choosing TSX stocks over S&P 500 companies, at least until interest rates begin to fall.

Mr. Kavcic notes that Canada’s real GDP growth of about 1 per cent over the past 12 months trails the U.S.’s 3.2 per cent by a significant margin. This comes despite Canada’s immigration surge, which should theoretically have boosted the economy. Domestic per capita GDP growth now trails the U.S. by a record 4.8 percentage points.

Relative equity performance effectively tracked the disparate growth paths. Over the past 12 months, the S&P 500′s 28.4 per cent total return in Canadian dollar terms was more than triple the TSX’s 8.1 per cent.

The S&P/TSX Composite Index does not have exposure to what is working in markets. U.S. technology, communication services and consumer discretionary stocks have jumped between 30 per cent to 60 per cent over the past year and now account for 50 per cent of the S&P 500 benchmark. Domestically, these sectors are only 17 per cent of benchmark weightings. Shopify Inc. can only do so much.

Near-record consumer debt levels leave the domestic economy much more negatively affected by higher interest rates. “While [domestic] households are now in the thick of mortgage renewals into higher rates (which is crimping disposable income and discretionary spending in Canada), many U.S. households have locked in [mortgage rates] for 30 years,” Mr. Kavcic writes.

The economist suggests it’s possible that sentiment towards domestic equities may have troughed, and valuations - which have fallen to attractive levels in many cases - are set to normalize and drive stock prices higher.

There are exceptions, but the bulk of the domestic market performance depends on either borrowing costs or Chinese economic growth. Falling interest rates will allow the domestic banks that dominate the benchmark to book profits instead of increased loan loss provisions. China, as the source of marginal resources demand, determines many of the commodity prices that drive Canadian energy and mining company profits.

-- Scott Barlow, Globe and Mail market strategist

Also see:

The Canadian stock market is a flop. Here’s why you should stick with it anyway

One stock added to S&P/TSX Composite Index, two to be deleted

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Stocks to ponder

Bank of Nova Scotia (BNS-T) Something unusual is going on with the bank’s share price this year: It’s outperforming. That may come as a relief to long-suffering shareholders who have seen the share price trail the other Big Six bank stocks by an average of 49 percentage points over the past five years. And as David Berman tells us, it could offer nimble investors a reason to look again at a bank stock that stands out for looking cheap.

The Rundown

Nvidia helps fuel the rise of CDRs as a way to invest in U.S. stocks, tech and otherwise

Canadian Depositary Receipts were launched by Canadian Imperial Bank of Commerce in July 2021 and have since attracted about $4-billion in assets as of last week. The most popular of the 54 CDRs currently listed on Cboe Canada is Nvidia, with assets of about $552-million. Rob Carrick believes more CDRs will be created because investors are clearly starting to see them as a convenient way to ride U.S. stock market stars.

Are telecoms bargains or value traps?

Shares of BCE Inc. (BCE-T), Telus Corp. (T-T) and Rogers Communications Inc. (RCI-B-T) are cheaper today than they were five years ago. BCE and Telus have also raised their dividends several times over those years, pushing yields to unusually high levels. Gordon Pape takes a fresh look at all three telecoms to determine if they are now buys.

New ways to find stable dividends

Norman Rothery’s so-called Smaller Stable Dividend portfolio, which follows 20 stocks, has more than doubled the returns of the S&P/TSX Composite Index since 1999. Now he’s devised portfolios of two smaller siblings, which track 15 and 10 stocks, respectively. The performance numbers are also quite impressive. (For an update on all his portfolios for dividend and value investors, click here.)

Why I’m buying more shares of this beaten-up dividend stock

John Heinzl has more than $4,000 of cash in his model dividend growth portfolio. He tells us how he is now putting the funds to use.

How Brian Mulroney proved the merits of privatization, and won over investors

Brian Mulroney’s legacy as Canadian prime minister includes at least one example that has been celebrated by many investors: his push to privatize several government-owned corporate entities. As David Berman reports, the stock market returns of several privatized entities have been rewarding.

U.S. value stocks draw bargain hunters while AI fever rages

Value stocks, typically defined as companies trading at a discount on metrics such as book value or price-to-earnings, have largely been left behind in the stock market as AI puts a charge into their growth-focused peers. However, gains in some value-heavy sectors such as industrials and materials have accelerated lately. As David Randall of Reuters reports, some believe that trend is only just beginning.

Hedge funds bet on U.S. real estate rebound

Hedge funds piled into long positions on U.S. real estate investment stocks last week, the sixth straight week that these speculators bet on a rebound in commercial and industrial properties. As Reuters reports, a major reason is the belief that these firms are going to be able to buy assets on the cheap.

Super Tuesday to test resurgent crypto industry’s political might

Crypto is back - and it’s not just in the markets. The burgeoning cryptocurrency industry is jumping into the 2024 U.S. election, spending millions of dollars in Super Tuesday primary contests in California, Alabama and Texas to boost crypto-friendly candidates and defeat those pushing for more regulation.

Others (for subscribers)

The 2024 Globe and Mail ETF Buyers Guide, Part One - Canadian equity funds

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Globe Advisor

Tech stock rally has advisors weighing growth versus dividend strategies for investors

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Ask Globe Investor

Question: I have three kids who are four years apart from each other. My eldest one just turned 18. My plan is to open a trading account for each of them when they turn 18 and lend them $200,000 each (from my company) and invest in the VFV ETF for the next 25 years. Is this a good investment plan or would there be something better that you would recommend? – Trishan R.

Answer: You plan to invest in VFV (VTC-T), which is the trading symbol for the Vanguard S&P 500 Index ETF. That’s a decent choice. The fund has a 10-year average annual compound rate of return of 14.34 per cent and a very low MER of 0.09 per cent.

But, good as this fund is, are you comfortable putting all the eggs in one basket for years to come? Market conditions can, and undoubtedly will, change dramatically over that time. And the tax position of your children may be such that at some point they would like to own more tax-effective securities.

The all-in-one approach leaves no room for diversification, either by security type or geographically. An alternative that would be easy to manage is to divide the money between four ETFs based on the S&P 500, TSX, EAFE, and bonds. The asset allocation can be adjusted depending on market conditions.

The bottom line is to retain flexibility. The financial markets are volatile and unpredictable. Manage your money accordingly.

--Gordon Pape (Send questions to and write Globe Question on the subject line.)

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