April Market Update

Money is a tool. It's something that supports your life!

Trump 2.0: Shaking Canada and Europe Out of Their Lethargy

It is becoming clearer that Trump’s tariffs and trade wars are less a means to an end than an end in themselves. The implications are profound. The macroeconomic impact is doubly negative as it increases inflation – which has not yet been tamed in North America based on recent U.S. and Canadian data – while lowering economic growth. We are not ready to call this a recipe for “stagflation”, but it is certainly a step in that direction. While the Trump administration is damaging its long-term credibility (it will be hard for allies to trust them on trade, aid, defense for years to come), the silver lining is that this is already shaking Canada and Europe out of their complacency and dependence on America. The upshot is that, despite near-term pain, we now have a better longer-term chance of boosting our own infrastructure spending, productivity, domestic manufacturing and defense capabilities, which have been a chronic area of weakness.

We are decreasing our allocation to the US market and increasing our allocation to non-US markets. We are in the process of decreasing our US stock weightings from a maximum of 30% to 12% and increasing our non-US holdings from zero to 14%. At the same time, we also are decreasing our US dollar exposure.

All of you should be aware that we have already taken a much more defensive stance with accounts holding anywhere from 27% to 33% cash.

 

This is due to: 

1) deteriorating trends in inflation, growth, and budget deficit (especially with massive IRS job cuts and possible incremental tax cuts) 

2) clouds on the employment horizon 

3) very high concentration in the S&P 500 where the “Magnificent 7” still account for a third of the market and expensive valuations with little margin of safety.

 

US Valuations are very rich compared to other countries

US massive overweight in MCSI World Index

US asset prices require a large US capital surplus, because in order to sustain the US’s equity market cap relative to the rest of the world, the US equity market needs to capture 70% of every dollar saved into global equities. The push to reduce trade deficits and escalate trade tensions with key US allies puts this system at risk. Foreign holdings of US assets tower over US holdings of foreign assets. That all could change in this new world.

We also note that earnings momentum (S&P 500 EPS estimates) is quickly deteriorating and that consumer/corporate sentiment surveys are plummeting as they currently sit at multi-year lows.

We are maintaining a slight preference for Canadian stocks, given a more economically-focused government is coming one way or another. The prospects for accelerated stimulus measures including infrastructure/defense spending, upcoming significant reduction of Provincial trade barriers, and much lower equity valuations are also positives. We recommend a market weight position in Europe (due to stimulus, increasing economic momentum, and cheap valuations) and Emerging Markets (due to stimulus from China, better relative economic momentum, and generally low valuations).

Simultaneously, we are increasing our allocation to: 1) cash, to be more defensive and have greater flexibility to take advantage of stock and bond opportunities as they arise in 2025/2026; and 2) fixed income, due to interest rates not fully pricing in economic risks which may prove positive for bond portfolios. Upside surprises to inflation could ultimately put a floor on how low government yields drop, supporting a cash position.

A key concern is that BMO Private Wealth's proprietary recession probability model has been trending higher since the middle of last year, now sitting at a 49% probability of recession in the next 12 months, and this is before reciprocal tariffs are implemented on April 2. As an aside, even if Trump decides to delay/postpone/reduce/amend (pick your descriptor) tariffs, we believe that the sheer uncertainty he has introduced will have a deleterious impact on future corporate investment decisions. On that point, a very recent CNBC survey shows that 95% of CFOs now expect a recession in the second half of 2025. We understand the argument that sentiment surveys at extremes can be a good contrarian signal, but this is not the recipe for major corporate capital expenditure growth.

Our view is that Trump appears entirely too focused on the trade deficit (which he views as the rest of the world “ripping off” America) and not nearly enough on the budget deficit.

In a nutshell, the trade deficit is explained by U.S. consumers being the richest cohort humanity has ever seen with a high propensity for buying “stuff”. In fact, U.S. household net worth just hit a record $169 trillion in Q4 of 2024 (the comparable figure for Canada is $17.5 trillion, also a record). Conversely, the rest of the world does not have the financial means to buy as many goods and services from the U.S., creating a deficit in the U.S. and a surplus for trading partners. The other important aspect of global trade is that a large proportion of other countries’ trade surpluses – with China having the largest by far – have historically been recycled into U.S. Treasury bonds, boosting the U.S. dollar and helping keep U.S. interest rates lower.

The budget deficit is a far greater risk in our view. Yes, the U.S. has been at it for a long time, but the current 6% deficit to GDP is too high given the fact that we are in an economic expansion. Economic orthodoxy would suggest that running a surplus in good times is prudent to keep some dry powder to stimulate the economy when a recession or exogenous shock eventually hits. Were they still alive, legendary economists John Maynard Keynes and Milton Friedman would not give them a gold star for that performance. Having the world’s reserve currency offers a country exceptional flexibility, but given the current U.S. foreign policy and potential long-term loss of trust in trade, defense, and aid from developed country allies, it is possible there will be less demand for American debt. Yes, there will still be a “clearing price” for U.S. bonds, but that cost to sell may be higher, meaning higher interest rates, which are also harmful to growth.

Europe

The ECB has cut rates a combined 150 bps so far this cycle, with the most recent 25 bp drop on March 6 to 2.50% being widely expected. The central bank still sees the disinflation process being “well on track” and that “monetary policy is becoming meaningfully less restrictive”. That line itself points to fewer rate cuts although there is a potential for more given the trade war has yet to truly ramp up. But now, the Governing Council can take a step back and see how these upcoming tariffs impact inflation and growth and be comforted in knowing that it is not dealing with this alone. There is support coming from Germany and its plan to unleash a 10- or 12-year €500 billion defense and infrastructure spending fund, outside of the constitutional debt brake. In the words of incoming Chancellor Riedrich Merz, he will do “whatever it takes” and this massive fund will have a multiplier effect of, by some estimates, 1-2x. That suggests the economy could grow about 1.5% on the back of this spending, which would be welcomed after Germany's economy contracted for two years in a row. So, this fund, along with the European Commission's € 50 billion loan-for-weapons fund, will help the ECB do its job.

 

Germany is breaking out of an 18-year base.

Is this the time to get bearish on the Canadian dollar?

The Canadian dollar has been in a trading range for 10 years, we are at the top of that trading range and usually that is the time to sell not buy.

 

Our Portfolio Management Approach

We are fundamental investors that use technical analysis to manage short-term market risks. We believe that risk management is not a choice, but a necessity. While we cannot control how much downside the market provides during a correction, we can control how much of the downside your account receives. We aim to avoid 60% or more of the decline in any significant downturn. Without our process, there is a good chance you will experience 100% of the downside from the market. We will help you navigate the risks and rewards of the market so that you can stop worrying about your money and start living your life.

Transactions

This month was a busy month in the accounts as we started to transition away from the US markets.

We took advantage of the recent pullback and added to The Royal Bank, National Bank, Manulife Financial and Pembina Pipeline.

We sold Telus as it broke down technically and the business environment is getting worse for all the Telecos and initiated a position in Nutrien.

Sold our SPY (S&P 500 index) for a good profit B@$464 and S@$568.15, sold ZQQ (Nasdaq index) B@$116 and sold @ $138.08, and sold XSP (S&P 500 index) B@$49.65 and S@$59.03. All based on the technical break down of the US markets.

We also sold Disney and Eaton Corp for profits. We feel that tariffs will hurt both of these companies.

Sold Costco for $936 after buying it for $592.50. If the consumer slows down their spending there is very little wiggle room for a company trading at 54 times earnings

Sold Timken for a small loss. Technical breakdown and could be hurt by tariffs.

Returns on our 60/40, 70/30 & 80/20 portfolios, before fees:

Interesting Charts

The Total Market Cap of the Toronto Stock exchange is $5.1 Trillion, less than Apple and Nvidia combined!!

Technical Comments

• The March monthly Emini candlestick was a big bear bar closing in its lower half with a prominent tail below and closing above the 20-month EMA.
• Last month, we said traders would wait for a strong breakout from either direction of the small trading range and trade in the direction of the breakout for a measured move (based on the height of the trading range).
• The bears got a strong breakout below the small trading range with strong follow-through selling.
• They got a reversal from a wedge pattern (Mar 21, Jul 16 and Dec 6), a double top (Dec 6 and Feb 19) and a triple top (Dec 6, Jan 24, and Feb 19 -).
• They got a measured move based on the height of the trading range which took the market to 5400.
• They then got a leg 1 equals leg 2 measured move which took the market to below 5200 in early April.
• They hope this is the start of a multi-month bear market.
• If there is a pullback, the bears want at least a small sideways to down leg to retest the current leg extreme low (now April 4).
• The bulls want the market to continue in a broad bull channel.
• They hope the market will form a higher low.
• They want the bull trend line, or the July 27 high area to act as support. If the market trades lower, they hope that the October 27 low area will act as support.
• They want the market to reverse back above the 20-month EMA.
• So far, March has traded lower with follow-through selling in April.
• The market remains Always In Short.
• If there is a pullback, there may be a small sideways to down leg to retest the current leg extreme low (now April 4).
• For now, traders will see if April’s candlestick will continue to get bigger and close as a strong bear bar near its low. If this is the case, the odds of more sideways to down in May will increase.
• Or will April’s candlestick close with a long tail below instead?
• Odds slightly favor the market to trade at least a little lower.

Planning Article

10 ways to divorce-proof your assets and protect your wealth

No one gets married with the expectation of one day filing for divorce, but it happens to somewhere between 38% and 48% of Canadian marriages. Whether you’re the primary breadwinner in a double-income household or you rely on your spouse’s income, studies show that it is a woman’s income that is generally reduced by a wider margin than her husband’s – in a traditional marriage – when their marriage dissolves1.

Unfortunately, high-achieving couples may also face more complexities in the divorce process owing to the large number of assets, shared business ownership, investments and more. That’s why it’s important to prepare for the worst while hoping for the best.

Click here to read more!

Millennial Minute

As we are in the full swing of tax season, Ashley wants to reshare last month’s article regarding whether you should invest your possible returns, or pay off debts.

She’ll be back next month with a new article to share. Happy tax season!

Click here to read more!

DISCLAIMER:

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of BMO Nesbitt Burns Inc. (\"BMO NBI\"). Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Information may be available to BMO NBI or its affiliates that is not reflected herein. However, neither the author nor BMO NBI makes any representation or warranty, express or implied, in respect thereof, takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. BMO NBI -will buy from or sell to customers securities of issuers mentioned herein on a principal basis. BMO NBI, its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. BMO NBI or its affiliates may act as financial advisor and/or underwriter for the issuers mentioned herein and may receive remuneration for same. A significant lending relationship may exist between Bank of Montreal, or its affiliates, and certain of the issuers mentioned herein. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp. Member-Canadian Investor Protection Fund.