Is now a good time to buy American stocks?
As the dollar appreciates, there are more articles in the financial press commenting on how U.S. stocks are becoming cheaper from the point of view of Canadian buyers. I am probably the last person from whom you should take investment advice, but there are some things to think about when you’re trying to decide if a stock is cheaper or if it is simply worth less.
Buying USD-denominated assets is in large part a bet against the Canadian dollar. Since 2000, Canadians who bought the S&P500 index instead of the TSX have generally regretted it [. . .] The average CAD return on the TSX was 11 per cent more than the CAD return on the S&P500 over the past decade. [. . .]
But that doesn’t necessarily mean that U.S. stocks are a bad deal, because they have one very attractive property: they generate higher returns for Canadians during bad times. This is the sort of correlation that is most valued by investors: we are willing to pay extra for assets that pay off most when extra money is most needed. For example, most people buy fire insurance, even though it is a money-losing investment for almost all households. Even though the odds of a fire are small, homeowners are still willing to pay for an asset that pays off when their house burns down.
I’m not in a hurry to invest in American stock right now, as I still see the US government’s debt addiction having the potential to drag down the US market much further. Not that staying in Canadian stocks insulates me from such things . . . but the impact should be lighter on Canadian holdings than on US positions.
