Given last week’s market movements, we want to share our thoughts on what transpired and provide our guidance on how to approach the events of the last few days. Surprises and uncertainty trigger market volatility, and we got a healthy dose of both last week:

 

- The tariffs announced last Wednesday by the Trump administration turned out to be much larger and broader than expected.

- The method used to calculate tariff policy was illogical and conveyed a naivete about how global trade works that was unsettling for global markets.

- Key U.S. trading partners like China immediately responded by increasing their tariffs on U.S. goods, increasing the odds of further retaliatory tariffs.  

 

Market participants read into current events, extrapolate ahead and often overreact, shooting first and asking questions later.  Markets are currently pricing in a much higher probability of a recession in Canada and the U.S., as consumers and businesses retrench and prepare for an escalation of trade tensions, higher costs of living, and supply chain disruptions.  So much for the “Trump bump.” While the last few days have been unsettling, market sentiment can quickly reverse course, so a steady hand is imperative.  Your investments are diversified, with cash and bonds that hold their value and provide flexibility to be opportunistic when other markets overshoot to the downside. 

 

What could immediately improve sentiment?

- America’s trading partners could de-escalate the situation by removing tariffs and other measures designed to protect their domestic industries, allowing the U.S. Administration a path to reciprocate in kind.  Vietnam and Taiwan, for example, have already offered to drop all tariffs on U.S. goods.

- The policy focus could shift to incentivizing and supporting domestic production rather than trying to punish the import of foreign goods. 

- Central banks could signal a willingness to cut borrowing costs further in response to rising risks of slowing growth

 

The market is also ignoring several long-term benefits that could result from a short-term period of adjustment:

 

- Countries like Canada or trading blocs like the European Union could focus on business-friendly infrastructure investments, incentives for entrepreneurs and innovators, the removal of internal barriers to trade, and invitations to a broader range of trading partners. 

- Companies continue the process ignited by the Covid lockdowns of re-aligning their supply chains to bring production closer to their customers, lowering transportation costs, reducing climate impacts and smoothing the wheels of commerce.

 

What Can We Do?

In 2023 we authored a blog post titled 'Rethinking Risk'. Our thesis was this: volatility is the price that markets make us pay in the short-term in order to capture elevated returns over the long-term. The real risk is that we outlive the buying power of our investments as inflation slowly eats away at the returns generated by less volatile investments.  During times like this we often direct clients back to this posting. Having a diversified portfolio of cash and bonds to provide liquidity and predictable income to complement higher returning vehicles like stocks, credit and real assets is essential to delivering upon both goals: staying invested during periods of market uncertainty, and ensuring we have investments that deliver higher returns than inflation over the long-term.   

 

Just like you, we have limited knowledge of what Mr. Trump plans to do next time he holds a press conference. What we do know, and have consistently done in the past, is successfully manage through uncertainty.  Like any other day, our management of your portfolios is guided by one consistent approach. We own a collection of durable businesses that have weathered worse storms.  After periods of stress, they tend to emerge having won market share from their competitors. The future of a durable business with sustainable competitive advantages is better today than it was before the tariff news. That’s the great thing about owning businesses in a position of strength.

Internal returns (earnings growth) tends to correlate with external returns (share price appreciation) over the long-term.  As long-term owners of durable businesses that exhibit above average internal growth, we are not swayed by short-term market movements.   Most stock market participants know the price of a security they own but not its value – this is the fundamental flaw of buying an index fund. There is very little in life as uncomfortable as watching the price of something you own go down when you don’t know what the value of that something is. It’s our job to know the future value of our businesses in the same way that the average person knows the value of a carton of eggs.

 

We continue to focus on actions that have historically benefitted investors during market corrections. These include adding to undervalued positions, rebalancing back to your target asset allocation, or harvesting tax losses while staying invested in securities with similar return profiles.  

 

Final Thoughts

Periods like this are unsettling. That is normal. But uncertainty is not new, and it is not permanent.  We remain focused on long term outcomes, rooted in data-driven research, strategic financial planning and thoughtful decision making.  This helps us sleep well, and we hope it lets you do the same.  As always, if you would like to connect in more detail please do not hesitate to reach out.