April 4, 2025

 

This week, it’s certainly been hard to avoid the news out of the US. I think that, with enough time—maybe four years from now—the word "tariff" should be banned from the English language. To that point, while the word has been the most searched term on Google over the past 90 days, the US President would be wise to take a closer look, as I think the current US administration has widely misinterpreted its definition.

 

A tariff is a fee paid on the import of goods from one country to another. The idea is to incentivize purchasers to look for alternative sources, such as their home country, to buy the same goods, as the cost of the good plus the tariff may make purchasing domestically more economical. That’s a broad definition, but it's much more accurate than the interpretation presented on Wednesday evening, when the President released a list of country tariffs and the reciprocal tariffs for each. The issue was that the tariff amounts weren’t actually calculated. Instead, they used a formula where the trade deficit was divided by imports. This meant that if the US bought more from a country than that country bought from the US, a tariff was effectively calculated at that percentage. For the most part, the reciprocal tariff was set at half that value.

 

What this essentially did was pit the world’s largest consumer—the US—against much poorer or less populated countries. If the US bought more from a country than the reverse, the US imposed a higher tariff, with the counter-tariff being set at about half that amount.

 

I don’t think you need to be an economist or a mathematician to realize that this isn’t what many analysts, investors, and citizens were expecting for what Trump called “Liberation Day.”

 

Most of our letters touch on the importance of staying invested, not panicking, reviewing what we own, and keeping our emotions in check. I’m going to avoid that this time, as all those points remain very true today. Over my 20 years in the field, and looking back even further, the data overwhelmingly shows that when you look 1, 3, or 5 years ahead during times of volatility, low consumer confidence, extreme pessimism, etc., you tend to see very good returns. This has always been true throughout market history. Good companies find ways to make it work, and I’m very confident that this time will be no different. The challenge, however, is that clients need to understand that we might not be right today, tomorrow, or even next month. But over time, being buyers or staying in your asset allocations pays off very well and is the single largest contributor to long-term investment returns.

 

I’d direct anyone who feels like the world is an endless spiral downward to our May and June 2022 posts.

 

Those were written in the face of the fastest rate hikes in history, a major war that is still ongoing, and widespread concerns about a recession. Looking back nearly three years later, I don’t think either commentary could have been more on point. However, I’m sure many readers, in the following six months, may have thought we were very wrong.

 

The market needs time to sort things out and engage in the price discovery process we mentioned in our last commentary. It always does, and nobody can predict how long that will take. That said, the market does discount news much faster than it used to, so most of what we saw on Wednesday should already be factored into valuations over the next few days. It looks like another day of that today, but remember, the best days are correlated very highly with the worst so it becomes very difficult to time. This price discovery doesn’t mean the values are necessarily correct; it just means that the news is out, people who have wanted to have bought and sold have done so, and the market has decided on a share price. What decisions are made going forward will now determine the next moves in the market. Some economists are increasing the odds of a recession in the US. Given the fact that a first-term President made a decision The Economist labeled "the most profound economic error in the modern era," one has to believe that those next decisions will be scrutinized so closely that they’ll have to find some semblance of balance moving forward. This certainly hasn’t been the case so far, but we believe that balance will likely emerge in the more immediate term as the market makes it clear that they aren’t happy with government policies. I’ve had a few comments on recession and what happens with the market. Remember the market is forward looking, some of that is being priced in as we speak. Calling a recession is backward looking, meaning the market often hits an inflection point before a recession is ever called, so selling in fear of recession is often not wise. I’ve attached a chart below with the dark vertical line as the market inflection point, green is the market and when the recession actually occurred. It’s hard to believe that a strong labour market and the best corporate US earnings Q4 since 2021 can turn into a recession in the matter of 3 months, but we’ll see how far the US is willing to push their new policies.

 

 

Remember, we don’t invest for the short term; we invest for the long term, and doing so has proven to work very well. Reminding ourselves of the intrinsic value of the companies we own helps provide comfort and guidance as we move forward. We are always reviewing our positions to decide on that value, adding to them where appropriate if we feel assets are undervalued, and continually reviewing the portfolios. We do this every day.

 

I believe that, having worked with most of our clients for such a long time, we have a strong understanding of your risk tolerance. Through our conversations, we’ve set up portfolios that provide the long-term returns you need while minimizing downside risk as best we can. It’s nearly impossible to always be positive, but if you are set up properly—with enough cash reserves and the right mix of assets—I believe we can weather this period, whether it lasts a week, a month, or even a year.

 

We have seen volatility reminiscent of the Covid days when valuations seemed disconnected from the true worth of companies. In situations like this, you just have to stay calm and remember past periods and how we’ve gotten through them. It may seem like an obvious and repetitive guiding principle, but to date, we haven’t found a time when it hasn’t held true.