The economy isn’t quite the stock market. You can have a stock market that’s on a seemingly unstoppable bull run at a time when consumers are feeling the pinch. These days, your average Canadian consumer is feeling the heat of inflation (and the heat has turned up a few notches of late), as well as a fairly lukewarm employment situation.
Combined with AI-related uncertainties about the future, it certainly doesn’t feel like the stock market should be just a stone’s throw away from returning to all-time highs. Of course, the TSX Index (let’s say the Vanguard FTSE Canada All Cap Index ETF (TSX: VCN), my preferred way to bet on the Canadian market) is just built differently, at least relative to the S&P 500, thanks in part to its heavier weighting in the banks and energy names.
Of course, energy prices have remained heightened throughout most of the year and with the full force of tailwinds behind the big banks, especially Canada’s own Big Six banking giants, perhaps it’s no mystery as to why the TSX Index is standing tall, even though the average consumer might feel a bit differently about how things actually are and how the economy actually stands to fare.
So, if you’re the least bit worried about the state of the Canadian economy, you’re not alone. But, then again, when has there been a time when there wasn’t something to worry about at the macro level or what could go wrong with the whole economic picture?
Indeed, it really does feel like you’ll find something to hit the panic button over if you go searching for it, even in times of relative calm.
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The Canadian economy isn’t exactly booming. But the TSX Index sure is!
While Canada’s economy isn’t exactly under the most considerable pressure, the growth has been modest, to say the least. As tariffs weigh and higher energy costs (a good thing for producers but a headwind for other firms and especially consumers) linger, it’s not hard to imagine how many Canadians are feeling just a bit uneasy about putting new money into the market. Combined with the strong 21.5% year-over-year gain in the TSX Index, it certainly feels like the easy money has been made.
Now, there are real risks present in the market today. And a correction (even a bear market) can never be ruled out. If the economy stays like this or even heats up a bit, there’s still a chance for a market contraction, especially if the Bank of Canada decides to hit the brakes a bit by increasing interest rates.
Who knows? An overheated economy might just lead to a “good news is bad news” climate in which investors and stocks fear higher rates rather than a softer economy.
Either way, investors should invest and not make too much of how the economy is faring or where it could go next year.
In my view, the stock market is more of a predictor of where the economy is headed rather than the other way around. And for investors, that’s not at all useful! If the economy predicted markets, economists would probably be among the richest on Wall and Bay Street!
The bottom line
So, instead of timing the economy, stick to a long-term game plan and stay invested, regardless of how you feel when you read the latest economic data point or projection.
Whether you opt to bet on the S&P 500, the VCN (or another Canadian ETF), or a mix of the two, think about consistency of contribution, not timing your entry points because, in the grander scheme of things, it’s investing that moves the needle, not trading based on economic signals that everybody else (including AI-powered algorithmic traders) already has a magnifying glass on!
At the end of the day, Canada’s economy will find its way, perhaps with a recession thrown in every so often. And the best way to benefit long-term is to stay invested through thick and thin!
