2019 Canadian Election Outcome

Brent Woyat - Oct 28, 2019
First things first. This is about the elections, but I promise – it’s not political. I figure you’ve had more than enough of that lately.
On Monday, October 21, Justin Trudeau won a second term as prime minister. However, Trudeau's Liberal Party failed to win the 170 seats needed for a majority in the House of Commons. That means Trudeau must try to lead a minority government, which could make it more difficult to advance his agenda.
Over the last few weeks, many clients have asked me what a minority government could mean for the markets. So, in this letter, I want to answer that question. I also want to reassure you that, no matter your stance on politics, the outcome of the election does not require us to make big changes to our strategy.
Minority Governments
Generally speaking, the thing that scares investors the most is being surprised. But the fact that we will have a minority government is not a surprise. In truth, for the entire campaign, we've known that a minority government was not only a possibility, but a probability. Furthermore, minority governments are not new. We have now seen 10 minorities out of the 23 elections since World War II – with four in the last 15 years alone!1
So, what do we know about minority governments? First, they tend to last an average of two years, about half as long as majority governments.1 As the Liberals have a plurality of seats, Trudeau will have the first crack at forming a government and setting the nation’s agenda. But to succeed, he’ll need to rely on other parties for support. Traditionally, it often takes longer for minority prime ministers to advance their initiatives – meaning even passing a budget may be difficult. But while it’s possible that Trudeau’s agenda could be voted down in the House, it’s expected he’ll have enough support from other, non-Conservative parties to stay in power.
The Markets
Assuming Trudeau can form a government for at least the next two years, what does that mean for the markets? It’s impossible to know for sure, but historically, the outcome of a federal election tends not to have much of an impact.
If you’re like most people, you probably have some strong political opinions. Maybe you’re thrilled about Monday’s results. Maybe you’re dismayed. Maybe you’re somewhere in the middle. But let’s leave that to one side for a moment.
The fact is, neither the Liberal nor Conservative parties tend to affect the markets compared to the other. According to one study, there is “…no systematic relationship between the party in power and stock market returns.”2 The same study found that in Canada, the TSX has averaged a “7.1% return under left-leaning governments, and 3.1% under right.”2 The difference between those two numbers is small – “not statistically significant,” as the study puts it – and can be attributed to a whole range of factors that are far more important than politics. As the study says, “It’s not what [leaders] do that matters, but rather when they get elected,” in terms of tracking stock market performance.2
Now, I’m not saying politics doesn’t ever influence the markets, because it does. But politics tend to have far less of an effect than people think. In fact, if you were to make a list of things that consistently move the markets in one direction or another, politics would be far down the list.
Potential Changes
Of course, there are some things we can expect from Trudeau’s second term. It’s a good bet that Canada will receive more federal stimulus, as the government had already budgeted for spending increases through 2020. Furthermore, Trudeau has indicated he wants to increase the deficit to more than $27 billion next year in order to fund social programs.3
One thing many analysts expect to decrease is individual taxes. Both major parties promised cuts to personal income taxes, although they would have tackled the issue in different ways. The Conservatives campaigned on lowering rates for the lowest bracket, while the Liberals want to raise the level of income a person can earn that is not subject to taxation.
For 2019, that amount is $12,069, and is adjusted annually for inflation. One of the Liberals’ campaign promises was to increase the amount by 15% over four years, meaning that by 2023, it will be $15,000.4 However, Canadians who earn more than $210,371 will not see the amount change (except due to inflation, as noted). Another Liberal campaign promise is to raise Old Age Security by 10% for Canadians over age 75 who earn less than $77,580. This would probably begin in July of 2020.4
To help pay for all this, the Liberals want to close many tax loopholes for corporations, especially in the tech industry. But any changes on this front are likely to be small, and thus shouldn’t have much impact on the markets.
The Economy
Less certain is what’s in store for Canada’s energy industry. Oil companies face a major issue in getting their products to global markets. While one new pipeline – the Trans Mountain – has already been approved, it’s far from certain whether others will follow. Given that Trudeau will need to strike deals with political parties that lean even further to the left than his own – parties committed to battling climate change – the energy industry faces an uncertain future.
But while it may seem hard to believe, all these storylines would still exist in some form even if the Conservatives had triumphed. And that’s why, as investors, it’s important we don’t base our decision-making over who’s in power.
I like to think of it by comparing Canada’s economy to Canada’s climate. Many people in the U.S. often imagine Canada to be nothing but cold and snow, but the truth is much more complicated. In reality, we don’t have just one climate, do we? Anyone who has ever driven across the length of our country would know how different Newfoundland is from southern Ontario, or Saskatchewan from western British Columbia. That’s because the climate is influenced by so many things. Latitude. Altitude. Ocean currents. Local geography, like mountains, forests, plains, and lakes. While the weather of any given place may change from day to day, the climate is much more stable.
The economy is the same. It’s determined by many things, like interest rates, oil prices, employment, etc. The government is more like the weather – it changes on a regular basis. But just as weather is not the same as climate, the government is not the same as the economy. It’s a factor, but not an overwhelming one.
And that’s why, however you feel about the election, there’s no need to overreact to it. Just as you wouldn’t throw out all your coats when the weather turns hot or rebuild your entire house when it starts to rain, we don’t need to make big changes to our investment strategy just because the government has changed.
If the overall economic climate changes? Different story.
As of this writing, our economy has a lot going for it. Canada’s GDP has grown 8% since the last election, a solid number.5 Canada’s unemployment rate is even better, having fallen to 5.5% as of the end of September.5 Add stronger wage growth and less dependence on oil prices, and you have a stock market that is healthier and less volatile than most others around the world.
The Takeaway
So, what’s the takeaway from all this? That no matter who is prime minister, or what type of government is formed, the ebb and flow of our economy will continue. That should be a comforting thought. Of course, a Trudeau second term combined with a minority government certainly brings its own opportunities and challenges, so my team and I will keep a close eye on Ottawa. But in the meantime, we’ll continue along the same course we’ve always been on, relying on the same tools and tactics, with the same destination as our goal.

1 “Minority governments in Canada,” Wikipedia, https://en.m.wikipedia.org/wiki/Minority_governments_in_Canada
2 “Presidential Politics and Stock Returns,” Research Affiliates, June 2017. https://www.researchaffiliates.com/en_us/publications/articles/614-presidential-politics-and-stock-returns-is-the-relation-real-or-spurious.html
3 “How a Liberal or Conservative win could affect Canada’s economy,” Bloomberg, October 21, 2019. https://www.bnnbloomberg.ca/how-a-liberal-or-conservative-win-could-affect-canada-s-economy-1.1334606
4 “Tax implications of the Liberal win,” Advisor’s Edge, October 22, 2019. https://www.advisor.ca/tax/tax-news/tax-implications-of-the-liberal-win/
5 “Trudeau’s economy,” Bloomberg, October 17, 2019. https://www.advisor.ca/tax/tax-news/tax-implications-of-the-liberal-win/