"Canadian Equity Markets: An Historical Perspective" 

by Sean Lawlor

21TreeFinancial.ca

Exploring the performance of the stock market from the 1930s to the 1990s, as experienced by those who witnessed it firsthand.

Each era of investment brings its unique stories, from the challenging 1930s, which tested investors' resolve, to the booming 1950s when markets appeared unstoppable, or the tumultuous 1980s that unsettled even the most experienced financial experts on Bay Street during Black Monday.

Examine how the fluctuating nature of today's markets contrasts with those of previous decades.

1930s:

This decade was marked by a dramatic downturn, an initial rebound, and then a prolonged period of decline—a sequence that might seem familiar to some. Eric Kirzner, a professor at the Rotman School of Management, reminds us that the crash of 1929 was followed by a brief recovery before a prolonged downturn took the market to its lowest points.

"The sequence was like this: the 1929 crash, followed by a short-lived rally, and then a protracted decline that led to the market bottoming out," Kirzner explains. He offers context by noting that the Dow Jones Industrial Average plummeted approximately 90% from its peak in 1923. "A 90% loss means you need a 900% gain just to break even," Kirzner points out, highlighting that it took until 1954 for these losses to be recouped.

This era significantly eroded confidence in the stock market. Kirzner shares a personal anecdote: "My father, who was a successful entrepreneur and started a thriving chain of jewelry stores, refused to invest in stocks after witnessing the market's collapse."

He emphasizes that enduring losses can deeply affect investors' attitudes. Kirzner mentions that some individuals who incurred losses in the 1970s never reengaged with the capital markets, despite opportunities for profit. "However, the 1930s also presented unprecedented investment opportunities for those who recognized the potential of enduring companies like General Electric, General Motors, and Allied Steel, acquiring shares at mere fractions of their value," says Kirzner, referencing the era's successful investors who capitalized on these conditions.

1940s:

Investing in stocks during this decade was hardly on anyone's radar, according to Phil Connell, who once served as the chief financial officer for companies like Oshawa Food Group and Canadian Westinghouse. Reflecting on the 1940s, Connell, now 87, recalls a time when even significant purchases like automobiles were incredibly affordable, stating, "I remember things selling for almost nothing, so anyone with a bit of money could have made a fortune."

For Connell, the Second World War overwhelmingly characterizes the 1940s, both in terms of its impact on economic activity and the stock market. "The war spurred economic activity, and post-war, the scarcity of goods, like automobiles, was so acute that people would line up for the chance to purchase one," he recollects. "Back then, even a nickel held value."

The principles of investing haven't completely shifted since then. "Having the financial resources was crucial for investing in the 1940s, just as it is today, along with the discipline to choose the right stocks," Connell points out. However, he observes a notable difference in the fiscal behavior of consumers and governments in the current era. "The U.S. continues to print money," he comments, suggesting a lack of financial discipline among consumers as well. "Many don't grasp the basic principles we understood—that one cannot spend all they earn. It's essential to save, but the prevailing attitude now leans more towards immediate gratification through spending," Connell laments.

1950s: A Time of Growth and Confidence

Joe Barnicke, now 88, looks back at the 1950s as a golden era of expansion. For investors, the mid-1950s marked a period where everything seemed to be on the rise. "Stocks felt much more secure during that time. The market was flourishing. It was a period of beginning for the country—highways were being constructed, and suburbs were emerging. The U.S. was expanding its presence significantly," reflects Mr. Barnicke, who established J.J. Barnicke in 1957 and later sold it in 2009 for $26.6 million.

According to Mr. Barnicke, the investment landscape was vastly different then, with technology not yet a sector and mining entities being among the few high-risk ventures. "The stock market was primarily composed of legitimate, fundamental manufacturing firms that produced tangible goods. Growth was tangible, and most companies listed on the exchange were credible," he observes. Barnicke also notes a stronger faith in the economy, highlighting that governments were not as prone to distribute funds as they are today.

Having experienced various market cycles, Mr. Barnicke remains unshaken, attributing his resilience to a focus on reliable stocks. Reflecting on the changes over the decades, he believes the most significant difference now is in the integrity of the investment community. "Back then, the market was not as plagued by self-serving brokers. In Canada, the investment scene wasn't dominated by those merely chasing commissions. Nowadays, there's a fee, regardless of the investor's outcome, which marks a stark contrast to the ethical standards we upheld fifty years ago.

1960s: Navigating Regulatory Constraints with Innovation

In an era when regulatory frameworks were rigid, Bell Canada and Northern Telecom, which would later become Nortel Networks, were connected by an actual physical wire running between their Montreal buildings—a quirky solution to satisfy 1960s regulators. Albert Jean de Grandpré, who would go on to be the chief executive of Bell Canada Enterprises, reflects on this workaround as a means to maintain ownership of Northern despite regulations that prohibited a phone operator from owning a separate company. "It was a symbolic connection to support our ownership of Northern, transitioning from merely a telephone company to a broader telecommunications entity," de Grandpré shares. He began his journey with Bell Canada as legal counsel in 1966, eventually leading as CEO and then serving as the first chairman and CEO of BCE upon its establishment as a holding company.

The concept of a telecommunications company diversifying its interests seems straightforward today, but such cross-industry operations were revolutionary at the time. Bell faced rejection in its attempt to enter the cable industry but succeeded in retaining Nortel as an independent entity. "Now, ironically, cable companies can offer phone services, showcasing how narrow-minded the world was back then," de Grandpré comments with amusement.

Reflecting on the 1960s and the challenges faced, de Grandpré contrasts it with the inflation troubles of the 1970s and 1980s, when regulatory constraints hampered necessary price adjustments amid rising costs.

Looking to the present, de Grandpré expresses concern over the current economic climate, particularly the weakening Euro and the struggling U.S. economy, suggesting a potentially unprecedented situation. "The U.S. has lost its financial dominance, and the political landscape is more divided than ever, with little progress toward addressing fundamental issues. The Eurozone, too, faces sustainability challenges without fiscal discipline among its members," he observes.

1970s:

Seymour Schulich, the billionaire who transformed Franco-Nevada into a mining powerhouse, reflects on the unique nature of current stock market movements compared to the past. "The most severe bear market I experienced was in 1973-74," he remarks. Schulich describes that downturn as gradually unfolding over 18 months, likening it to a prolonged torment rather than a swift collapse. He notes that the early 1970s were relatively stable until that downturn, and it wasn't until the late 1970s that the market began to recover significantly. However, he points out a key difference: "Back then, the market wasn't as volatile. Now, it's not uncommon to see stocks swing by 20% in a single day."

Schulich also mentions the challenges faced by traditional investors today, such as staying informed about the daily trading volume of stocks, which is complicated by the existence of multiple dark pool exchanges. "Brokers with the resources can access this information, but I rely on the Toronto Stock Exchange for my data," he says.

He acknowledges that the 1970s had their share of regulatory gaps and questionable practices, including the absence of capital gains tax and insider trading regulations. "It was a wild time, but not everyone was an angel," Schulich admits. Yet, he criticizes the shift in the capital markets' role, from funding businesses and supporting economic growth to resembling more of a "giant casino."

Schulich calls for the prohibition of practices such as high-frequency trading, which he equates to front running, where brokers execute trades based on foreknowledge of upcoming transactions. "Such actions would have drawn regulatory scrutiny in the past," he says, advocating for a return to a market that prioritizes its foundational economic functions over speculative trading.

1980s:

During the 1980s, Peter Godsoe was in Dallas on the infamous Black Monday, October 19, 1987, when the Dow Jones Industrial Average plummeted over 22%. The event unfolded as he lunched with professionals in the finance sector, who were stunned by the market's drastic fall. "It was a mix of disbelief and confusion among those from various sectors, much like the discussions we have today," the 73-year-old ex-CEO of Bank of Nova Scotia reflected. In response to this market turmoil, stock exchanges implemented circuit breakers to halt trading after significant declines, aiming to prevent such crashes in the future.

The decade began amidst a recession, yet, looking back, Godsoe views Ronald Reagan's election as a pivotal moment. "Reagan's victories not only changed the political landscape but also helped the United States overcome a period marked by economic struggles and the divisive aftermath of Vietnam," he observed.

According to Godsoe, today's markets mirror those of the 1980s, with volatility being a significant difference. He pointed out that derivatives, even in the 1980s, introduced volatility, though they were more niche. "The rise of hedge funds wielding vast, unregulated funds, alongside the advent of algorithm-driven trading, has escalated market volatility," Godsoe noted, debating whether these factors enhance or hinder market liquidity.

1990s:

In 1995, Scott Paterson joined Yorkton Securities, coinciding with the public offering of Netscape Communications, a hallmark event that marked the burgeoning era of the internet. Despite the nascent stage of internet usage, Yorkton Securities, which would later underwrite numerous successful tech firms of the decade, hosted an online conference call for Open Text Corp. Paterson reminisces about the period as one filled with immense enthusiasm and expectations, although the commercial viability of many ideas lagged behind investor interest. "It was a time when technological visions were far ahead, anticipating a future that's only becoming a reality now," he reflects.

During the late 1990s, as gold prices dwindled and firms struggled to secure capital, Paterson, now at the helm of Paterson Partners Inc., observed a fervent belief in the future of technology and the internet. He notes a significant change in information flow by the decade's end, with the acceleration of news dissemination transforming market reactions—moving from gradual stock declines over days to immediate impacts on stock prices due to instant information flow.

Paterson voices concern over current market vulnerabilities, particularly criticizing the regulatory allowance of short selling without the restriction of upticks, a practice he views as precarious.

Bill Andrew, having weathered various market cycles as the former CEO of Penn West Petroleum Ltd. and now its vice-chairman, maintains a composed view of market fluctuations. Drawing on over three decades in the oil and gas sector, he sees parallels between past and present market dynamics, noting the cyclical resurgence of Asia and a general trend towards quality investments in uncertain times.

The rise of hedge funds, Andrew points out, has been a double-edged sword, initially boosting the market to new highs before contributing to its downfall. He highlights a significant regulatory change in Canada during the 2000s—the elimination of tax exemptions for most income trusts—a move that particularly impacted the oil and gas industry and left investors seeking alternative yield options.

Reflecting on the current market, Andrew expresses surprise at the soaring price of gold, viewing it as an indicator of prevailing economic uncertainty. This shift towards gold underscores a broader search for stability amidst fluctuating market conditions.