Investors are endlessly warned not to expect double-digit returns from stocks, but the S&P 500 has delivered this result with remarkable consistency in recent years.
The S&P/TSX composite index has trailed the S&P, in large part because the Canadian stock market lacks exposure to the hot tech sector. Even so, the S&P/TSX composite has delivered very strong results as well.
The financial headlines tilt to the negative these days: high borrowing costs, stubborn overall inflation and brutal price increases in grocery stores. Recession worries persist, and signs of household financial stress are more and more evident. If you don’t already own a house, the cost of buying or renting a home is a black hole of unaffordability for many.
But stocks! Shrugging off all bad news, the S&P 500 has made 20.4 per cent in the past 12 months, 11.6 per cent on an average annual basis over the past three years, 11.5 per cent over the past five years and 15.2 per cent over the past 10 years. Those are Canadian-dollar total returns, which include dividends.
The S&P/TSX composite is up 8.4 per cent in the past 12 months, an average annual 10.3 per cent in the past three, 7.8 per cent in the past five and 8 per cent in the past decade. For context, guidelines for financial planners to use in their work set 6.2 per cent as a realistic long-term expectation for Canadian stocks and 6.5 per cent for foreign developed markets such as the United States.
Hot stocks may seem like a storyline for the fortunate few at the top of the income scale. But actually, a huge swath of the population benefits. Gen Zs and millennials can benefit from strong stock market returns in their First Home Savings Accounts. Gen Xers are in their prime retirement saving years – hot stocks help drive good results.
Boomers and seniors have the most wealth already, but also the greatest need for that money in funding retirement income. Strong stock markets help keep retirement portfolios growing, even as money is withdrawn.
Stocks will tank at some point – that’s both a done deal and a buying opportunity. If nothing else, the current boom time for stocks shows us how resilient they are as a way to build wealth.