Canadian banks continue to be a long-term opportunity despite recent headwinds

Bank stocks typically underperform heading into a recession. They act as a proxy for the health of the economy. If the market is looking 18 months into the future, they expect a slowdown in activity from the banks. However, once we’re in a recession, banks typically outperform. The following charts show the returns of Canadian banks during and after recessions along with the start date of every recession over the last 40 years in Canada.

The information was prepared by CIBC Asset Management Inc. using third-party service provider Morningstar Direct, as at August 31, 2023.

In every recession and timeframe analyzed, Canadian bank stocks outperformed the broader S&P/TSX Composite Opens in a new window.. Why? Markets are forward-looking and typically anticipate an economic recovery even while a recession is underway.

Despite headwinds, bank fundamentals remain solid. Valuations are now at multi-decade lows with high dividends that pay investors to hold through the cycle. As at August 31, 2023, Canadian Banks pay close to a 5.00% dividend yield, in comparison to a 3.55% dividend yield for the broader Canadian market, and 1.68% for the S&P 500 Index Opens in a new window.. (Indices used as a proxy: Banks — S&P/TSX Banks Index; Canadian market — S&P/TSX Composite.)

Canadian banks are some of the most well-capitalized, safest financial institutions globally, and long-term investors are being paid to hold onto them.

Overall, we maintain ownership of several banks within our portfolios at CIBC Asset Management. Very often, the best time to invest in Canadian banks is in the midst of a recession, and we continue to see medium to long-term strength in the Canadian banking sector (PDF, 215 KB) Opens in a new window..

CIBC Asset Management is committed to providing market and investment insights as well as best-in-class research. We want to help you find the right solutions to guide your investment journey. If you’d like to discuss equity investment opportunities or have questions about your investment portfolio, please reach out to your advisor or CIBC representative any time.