While the economies of Canada and the U.S. share many similarities, why has the U.S. recently posted solid economic growth while Canada has been relatively sluggish? This divergence may be attributed to a variety of factors. Higher interest rates have affected Canadians more than Americans, largely because we hold higher debt loads and our debt renews more quickly. The average Canadian mortgage has a 5-year term, whereas the average U.S. mortgage has a 30-year term. Many Americans secured fixed rates during their lows, so there has been less exposure to rising debt payments. This has helped sustain U.S. consumer spending. Consider that 68 percent of U.S. GDP is attributed to consumer spending!¹ As long as labour markets remain robust, consumer spending is expected to continue. As well, U.S. government initiatives, such as the Inflation Reduction Act (focused on clean energy), the CHIPS and Science Act (backing the semiconductor industry) and the Bipartisan Infrastructure Deal have earmarked trillions in spending, which has helped to support economic growth.²

As we consider these economic differences, it is worthwhile remembering that there are also distinctions from an investing context. Canada, with its considerably smaller population and total output, represents only a fraction of the global equity market, or about 3 percent (pie chart). The Canadian equity market is overweight in financials and energy sectors, but underweight in technology, healthcare, consumer discretionary and consumer staples relative to the U.S. and broader global market. One interesting perspective comes from the MSCI All-Country World Index (ACWI). Over the past decades, U.S. equities have expanded from around 45 to over 60 percent of global markets share within the index (graph).

These distinctions should highlight the importance of diversification. Different asset classes, sectors, industries and geographies can exhibit varied performance at different times. As the chart above shows, no single sub-asset class has consistently performed at the top over time. Diversification serves to shield against the downturns that can affect sectors at different times, while giving access to the top performers.

However, consider also that time can change most things. As we contemplate Canada’s economic path forward, let’s not forget that just three years before the pandemic, some suggested: “The American Dream Has Moved to Canada.”³ This should serve as a reminder that economic direction and perspectives can quickly evolve, emphasizing the enduring value of diversification over time.

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^{1. https://www.usbank.com/investing/financial-perspectives/market-news/consumer-spending. html; 2. https://www.cbc.ca/news/business/armstrong-economy-us-canada-stimulus-interest- rate-1.7016698; 3. https://macleans.ca/news/canada/the-american-dream-moved-to-canada/}

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