General Economy

Growth Will Persist

May 1, 2024

A little over six years ago, renowned investor Warren Buffett made a bold prediction: The Dow Jones Industrial Average (Dow) would reach the milestone of one million within 100 years.1 At first glance, his assertion appeared somewhat incredulous since the Dow was hovering around the 22,000 mark. Today, it stands close to the 39,000 level.

Yet, looking deeper into the numbers, the same could be suggested for the S&P/TSX Composite Index (S&P/TSX). At the time, the Dow needed to compound at less than 4 percent annually to achieve Buffett’s target. Canada’s S&P/TSX would need an annualized return of just 4 percent to reach the 1,000,000 mark by 2124.

However, Buffett’s point wasn’t to suggest whether some arbitrary benchmark could be achieved. Rather, his prediction was meant to reinforce confidence in future growth and the fact that we can all benefit if we choose to participate. History has shown that equities outperform most asset classes over the longer term; not so surprising since the overall growth in corporate profits has been an upward trajectory over time.

Today, we are living through a pivotal time due to the availability of big data, high-powered computing and advances in artificial intelligence (AI). While the U.S. equity markets have seen substantial gains due to the handsomely-rewarded technology stocks, the productivity and growth potential are expected to be far reaching, well beyond the tech sector.

Canada’s stock market has trailed due to its more cyclical nature, but is poised to benefit from interest rate stability and declining long-term rates. Corporate earnings may be driven by higher margins through efficiency gains and lower input costs, particularly as inflation moderates. The comparative strength of the U.S. economy, our largest trading partner, may provide near-term support. And, the potential for interest rate cuts is expected to provide tailwinds to equity markets.

While Canada’s economic output continues to be sluggish, consider that our economy has been relatively resilient given the challenges of the past few years. Wealth, wages and employment are all higher than they were before the pandemic began. And, seasoned investors accept that over time economies and markets will ebb and flow. Periods of retrenchment are natural parts of the business cycle and sometimes necessary to allow economies to cleanse excesses and reset, or even spark innovation and growth. This is one reason that supports diversification in portfolio management. It is also why we continue to invest with a longer-term view.

Indeed, the longer-term outlook for economic growth continues to be positive, with technology set to drive productivity and continued innovation, alongside efforts by governments to control inflation and focus on infrastructure and sustainability initiatives — just some of the factors that should help us prosper in North America. Growth will persist — and we can all benefit if we choose to participate. We are here to provide wealth management ideas, strategies and support as we progress towards the 1,000,000 milestone.

1. https://www.wsj.com/articles/warren-buffett-says-the-dow-is-going-over-million-1505923803

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