Springing Forward
Back in the fall I highlighted the potential for Canadian stocks to spring forward versus U.S. stocks. Their multi-year underperformance had left investors cold along with U.S. value, U.S. small cap, international, and emerging market stocks. While small cap stocks and value stocks subsequently dodged the winter blues with strong relative returns, the others stayed in hibernation. Will these others join small cap and value stocks and spring forward?
Fall and Winter
I have added the data for the fall and winter season to the second chart from the Uh “O Canada” blog in Chart 1 below. The lines show the relative performance of five different indices versus U.S. large cap stocks since December 2019. The numbers on the far right show the amount of outperformance or underperformance. All the returns are in U.S. dollars. For example, the orange line shows the return of an index of U.S. small cap stocks (the Russell 2000 index) divided by the return of U.S. large cap stocks (the Russell 1000 index). The light blue shading indicates the cold zone where the index return is less than or equal to the return on U.S. large cap stocks. The green vertical line shows where the data ended in the chart from the previous blog.
Chart 1
Looking to the right of the green vertical line, you can see that the performance of small cap stocks (orange line) and value stocks (blue line) was hotter than U.S. large cap stocks during the cold season. Both outperformed by over 20% since September. As shown by the numbers on the far right, only small cap stocks outperformed since 2019. And even so it was by just 5%. The relative performance of emerging market stocks (black line) went up until January and has been falling back since then. The relative performance of Canadian and international stocks has been frozen slightly above and right at their September levels, respectively.
Warming Trend and Deep Freeze
Chart 2 below looks at the same data as in Chart 1 but over a longer time horizon of 10 years.
Chart 2
The warming trend for small cap stocks (orange line) and value stocks (blue line) is clear. Although their relative performance has gone up since the fall, over the last decade they are still lagging large cap U.S. stocks. Small caps are behind by 17% and value stocks by 26%. This leaves some room for further outperformance.
It is a different trend for Canadian, international, and emerging market stocks. Their performance is still submerged in a deep freeze. The best we can say is that they seem to have stabilized in that zone. Since 2011 Canadian stocks have underperformed large cap U.S. stocks by 53% and international and emerging market stocks have underperformed by 62%.
Spring Is In The Air
Is the season now upon us for a thawing of the relative performance of Canadian, international, and emerging market stocks? Will the sun continue to shine on small cap and value stocks?
As we saw in Chart 1, small cap and value stocks are up sharply versus large cap U.S. stocks. Looking back at all the recessions since 1980, month end data shows that the median increase in small cap stocks after their recessionary trough has been 120%. The range has been an increase of 83% to 136%. So far, using month end data, small cap stocks are up 95% since August 2020. So there may be some limited room to continue to outperform U.S. large cap stocks. But we are getting late in the season. Value stocks are a different story. As you can see in Chart 2, they are still down 26% versus U.S. large cap stocks over the last decade. This means they have room to blossom further.
The sky may be clearing for Canadian, international, and emerging market stocks. Monetary and fiscal policy remains accommodative. Vaccinations, while lagging in Canada and Europe, are rolling out and progress is being made. Consumer cash balances have grown substantially. Pent-up demand is substantial for many services and goods that are limited or not available at all. While they may take some time to come out of hibernation, Canadian, international, and emerging market stocks should have an overweighting in a portfolio over the upcoming seasons.
Invest Wisely,
David Schaffner, CFA
Principal, Wayfairer Capital Management