If history is any guide, a win by Justin Trudeau and the Liberals bodes well for Canadian stocks.
Stretching back to 1922 and the time of William Lyon Mackenzie King’s first term in office, stock returns have been three times higher under Liberal prime ministers than with Conservative leaders, this according to monthly data up until August 2015 compiled by Bloomberg from TMX Group Ltd., operator of the Toronto Stock Exchange.
Over about 63 years in power, the Liberals of Pierre Elliott Trudeau, Jean Chretien and Louis St-Laurent witnessed a weighted compound annual growth rate of 6.8 per cent for the Standard & Poor’s/TSX Composite Index and its predecessor TSE Index. That compares with a 2.2 per cent annual gain for the Tories of Stephen Harper, John Diefenbaker, Brian Mulroney and others.
Is it timing? Have the Liberals been lucky over 100 years to do so well? Over 100 years there does seem to be a pattern. It could be that when economic growth is poor, people want austerity and think Conservatives are better managers. Then when things improve people get tired of that and they vote for the Liberals. Or has change always come at the right time?
The data, which covers the tenures of more than a dozen prime ministers of both major parties, compares the compounded annual growth of Canadian stocks weighted relative to the amount of time a particular leader was in office. The longer the time served, the greater the impact on the resulting figures.
Under Harper, Canada’s leader since 2006, the benchmark gauge has posted compound annual growth of 1.5 per cent, the second-worst performance of any prime minister since Richard Bennett. Bennett, a Conservative who ruled during the time of the Great Depression from 1930 to 1935, is the only prime minister with a negative stock return of 9.7 per cent. Pierre Trudeau’s second term was weaker than Harper’s for stock performance but his overall tenure was better.
As with other leaders, Harper’s stock market record reflects events that are beyond his control. The incumbent Conservative led the country through the worst global financial crisis since the Depression and more recently witnessed a 50 per cent drop in the price of oil, one of the nation’s biggest export products. As a result, Canada’s economic growth will be about 1.1 per cent this year, one of the weakest in the Group of Seven countries.
Markets are, at least in part, a reflection of confidence or a lack thereof. It is interesting that the Liberal legacy of sound economic management, jobs and growth, is something we don’t hear about during election campaigns. But it would appear that they have delivered and can contribute to the economic growth of a country.
Typically if you get more money into the hands of people with a higher tendency to spend it that’s good for economic growth. The market will do better if the Liberals are seen as more of a middle of the road player that encompasses all, as opposed to the Conservatives which have been linked to business and benefiting corporate entities.
Liberals returns
The 13-year Liberal dynasty that came before Harper, led by Chretien and Paul Martin, presided over combined compound annual growth of 8.3 per cent from 1993 to 2006.
Martin, who held power for three years through a minority government, posted the best compound growth rate of any elected Liberal at 18 per cent. Resource stocks in the S&P/TSX surged as the Canadian economy wrestled with a weakened currency for much of their rule, along with the rise of China as a global economic power and the rapid rise of commodities prices from crude to gold.
Again we must understand that the Harper government went through the financial crisis of 2008, which certainly was not his doing.
All is not lost for the Conservatives, however. The best performance of any prime minister was the nine-month rule of Joe Clark from June 1979 to March 1980. Canadian equities surged 33 per cent during his time in office, for annualized compound growth of 47 per cent. Elected at age 40, Clark was the youngest prime minister in Canadian history.
This is not to say that Trudeau will not go through a financial crisis, or market correction over the next four years. But while in power the results from the markets going forward are in his favor. 2015 has been flat year with minimal gains and as we have seen in the past there is a calm before the storm approach in the markets. We cannot predict markets going forward but we do know that they will go up and of course go down. Timing may once again in favor of the Liberals.
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