Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, highlights the week’s financial headlines and offers perspective for Canadian investors.
Putting 2022 into context (it was pretty bad)
One chart that stood out this week illustrates just how damaging 2022 was for global markets. When U.S. equity losses are combined with an approximately 13% decline in the Bloomberg Aggregate Bond Market Index—the worst performance in more than four decades—the result is one of the weakest years on record for major capital markets. For a traditional balanced 60/40 portfolio (60% stocks, 40% bonds), 2022 ranks among the worst years historically for American investors.
Canadian investors fared somewhat better but still experienced meaningful declines. The S&P/TSX Composite Index recorded a loss of roughly 8.5% for 2022, while a representative Canadian bond index dropped about 11%. Taken together, a 60/40 portfolio invested in Canadian assets would have fallen nearly 10% over the year, and closer to 12% after typical mutual fund fees.
Four key takeaways from that outcome:
- High equity valuations and historically low interest rates at the start of 2022 increased the risk of very poor one-year returns, even for broadly diversified portfolios.
- Paying elevated investment fees only amplifies the pain of poor market performance.
- Economic indicators today are mixed, but the economy is not in a depression comparable to the 1930s or as severe as the 2007–2008 global financial crisis; this supports confidence in long-term investment returns.
- “The Great Inflation” is a fitting label for the environment investors faced in 2022, reflecting elevated inflation and its market impact.
Should you “wait for the market to bottom” to start investing again?
I once found myself at a dinner party where a guest confidently advised everyone to go to cash and wait for the market to collapse so they could buy everything cheaper later. His plan hinged on the idea of recognizing the exact bottom. When I asked what signal would tell him the market had bottomed, his answer was essentially, “when things start going up and the economy looks better.”
That response illustrates why trying to time the market bottom rarely works. You must not only get valuation analysis precisely right, but also predict short-term sentiment swings—“animal spirits”—that move prices. By the time markets start to recover visibly, it is often already too late for those sitting on cash to participate in the best gains.
Historical evidence shows that many of the market’s best single-day gains occur shortly after a bottom, when pessimism is highest. Missing just the handful of best days can materially reduce compounded returns. For example, data covering thousands of trading days shows that missing the top 10 best market days can cut an annualized return from roughly 7.7% down to about 4.7%.
Coincidentally, that dinner was near the start of a market recovery. Markets can, of course, re-test lows, but waiting for a clear “bat signal” to start buying usually means missing important recovery gains. For most long-term investors, a disciplined plan and consistent investing trump attempts to perfectly time the bottom.
How cheap are Canadian stocks right now?
The silver lining of a bad market year is that, all else equal, lower prices increase the probability of higher future returns. If corporate earnings remain solid, Canadian equities look positioned for attractive medium-term returns.
Several valuation indicators support a cautiously optimistic view. Canada’s cyclically adjusted price-to-earnings (CAPE) ratio sits just under 21x—roughly in line with historical norms—while the forward P/E for broad Canadian equity measures is near 12.6x, below long-term averages. The dividend yield on the S&P/TSX 60 is back around 3%, suggesting valuations have cooled from the exuberant highs of recent years.
These large-picture metrics imply potentially “normal” or solid returns over the medium term. That said, they are not a guarantee, and short-term volatility can still produce wide swings up or down. This is not a recommendation to buy any specific stock or ETF, but a reminder that lower valuations often increase expected future returns for patient investors.
Tesla versus the world
Tesla’s valuation narrative remains a reminder of how difficult stock valuation can be. At times the company’s market capitalization exceeded that of many global competitors combined, based largely on expectations of future dominance in the electric vehicle (EV) market. In late 2022, Tesla’s shares plunged roughly 14% in a single session amid negative headlines and heightened investor scrutiny.
To put recent moves in perspective: when Tesla’s margins and production were less established, it was once valued at over USD$1 trillion. After significantly increasing deliveries—about 40% more vehicles in 2022 versus 2021, reaching roughly 1.3 million cars—its market value settled near USD$350 billion.
Retail investor enthusiasm has driven a large share of Tesla’s price action. If Tesla remains moderately successful but faces strong competition from legacy automakers that scale EV production—Ford’s electric F-150 is an example—then the lofty expectations baked into the stock could be hard to justify. Watching how established manufacturers translate popular vehicle lines into compelling EV models will be a key barometer for the industry’s broader adoption.
The MFDA and IIROC merge
On January 1, 2023, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) combined to form the New Self-Regulatory Organization of Canada. The merger creates a single self-regulatory framework for a broad range of Canadian investment dealers and mutual fund dealers—an important structural change for the industry.
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances at MillionDollarJourney.com and through the Canadian Financial Summit.