Markets have taken a hit since mid-February, and we are indeed in “correction” territory now. Therefore, our short-term indicators are all into the Yellow and Red Zones. It is important to note that we saw a similar pullback in the late summer of last year, only to end much higher by year end.
We are writing here on Friday morning and markets look like they will be down again today but are bouncing off their lows. We had already been raising cash and being defensive with the portfolio, and we continue to reduce stock exposure. The major implication that investors fear is that the tariffs may increase inflation risks as tariff costs are passed onto the consumer. There is also the potential that higher prices may dampen consumer spending and possibly lead to a recession. That does not mean the latter is anywhere near certain. We will remain heavily on defence and continue to move to cash and equivalents. The longer plan, of course, is to remain on the sidelines until our indicators begin to turn up – again similar to how the markets fared mid-last year. We continue to look for probabilities of moves using our technical charts and will remain disciplined to our indicators and rules.
However, the fact that we are still in the Green Zone in our mid to longer term indicator our Equity Action Call / Stoplight tells us the greater likelihood is that this pullback or correction remains shorter term in nature. We would like to emphasize that while this tumultuous period certainly does not feel good, market corrections from time to time are normal. We look to limit the downside and be ready with our cash to capitalize on a bottom.
We are currently very protective on the portfolios with lots of cash, bonds and defensive positions. We do, and typically, still want to hold some stock for the eventual turnaround, and we expect that those positions would recover quicker when the bottom comes. While we expect that accounts may go down slightly to sideways from here, they should be well insulated and move much less downwards than the markets – for example, we were down less than half of the market move on Thursday. We have seen many instances where investors panic and go to all cash, but fail to get back in, but we can miss a good portion of the downside using our indicators, putting us in a much better position when the pullback ends. We do not look to prognosticate, nor will we speculate or take on unnecessary risk. As we’ve iterated many times before, what you own is what we own.
A pullback was overdue in the markets after the long bull run since the fall of 2023. It simply required a trigger, and while the institution of tariffs by the Trump administration across the board was certainly a catalyst, it has exacerbated the pullback much more than expected. There is a lot of uncertainty and confusion about them, which we will attempt to give our views and hopefully some clarification. The confusion and concerns have created uncertainty and volatility in the short term, but we reiterate that we do not see this as a long and protracted down market. Hopefully, by mid to late 2025, we expect to see some sort of negotiation on tariffs and hopefully cooler heads will prevail.
From a technical view, the extreme moves on Thursday and Friday (so far) may actually be the sign of the bottoming process in a medium-term correction known as “capitulation”, where “weak” investors and “speculators” throw out everything, including the baby with the bath water. That could also explain why gold did not hold up well on Thursday when it is typically seen as a safe haven. Often, near bottoms, the risk investors are forced to sell to cover losses, which would lead to markets being oversold and we will look to take full advantage of that. But until then, we remain cautiously optimistic.
We will not pass judgement on the tariffs, good or bad (though it certainly feels bad), and wait for the actual results. What we would rather focus on is the rationalization of why the Trump Administration would take them on and risk causing this “disruption” to the financial markets and potentially the economy.
First and foremost, it is important to understand that the U.S. National Debt is on track to hit $37 Trillion shortly. That is about $107,246 per citizen. The Debt to GDP Ratio is currently at 122.60%. Back in 2008, we only talked about such high ratios when it came to countries like Greece and Spain.
For comparison purposes, Canada’s debt is sitting at about $1.37T, or $41,283 per Canadian, and our Debt to GDP is 108% (the same as Spain currently) for a population just under 37 million people. Canada is also much more fiscally vulnerable than the U.S., as our economy is smaller, and with a currency that is not a reserve currency.
We have spent a fair bit of time examining and analyzing the comments and conversations of many of the administrations’ voices, including that of the Commerce and Treasury Secretaries and various financial pundits and analysts – some factual and some speculative. Most point to the theory that this is still part of a big negotiation tactic to level the playing field of global trade for the US, including tariff barriers and non-tariff barriers, as well as revive the loss of jobs and manufacturing. The end goal is likely to lower the national debt and expenses, taxes and the cost of living for Americans. To do this, they have decided to institute the tariffs and cut government spending via Congress and the work of the Department of Government Efficiency.
Yesterday, the Trump administration announced tariffs across the board for all countries, while leaving Canada and Mexico with those they had already imposed. The tariffs are expected to bring in cash in excess of $600 billion annually. They will also provide a push to bring back manufacturing and jobs to the US, and while this may take some time, it is important to note that they have already received commitments for $2T in new businesses from SoftBank, Oracle, Honda, Taiwan Semi conductor and many more, etc.
Countries may resist or retaliate on a global level. As such, we expect more reciprocal tariffs from Canada, and probably from Europe/EU, which could escalate the situation. The other alternative may be similar to the United Kingdom, where countries may opt to try to de-escalate, while others remain paralyzed and sit on their hands.
The bottom line is that these tariffs will likely bring, or force, countries to the negotiating table by mid year at the latest. Sooner or later, there will be some negotiation and concessions to make tariffs between countries “more fair” from the US viewpoint. Countries currently benefitting in trade relationship, especially those whom Trump considers at the expense of the US, will pay their fair share, and it is likely that the cash brought in will be used to subsidize Trump’s tax cuts.
In the short term, the downside is that the tariffs will push up costs for everyone, including Americans, and could potentially lead to inflation issues and even a recession. The administration admits there may be hardships in the coming months but expects to offset this by various means. All plans are designed to cut spending and or put money back into the hands of US citizens. So what are some of these plans?
The first is by Deregulation, which makes it easier to conduct business by reducing red tape and significantly cutting costs. This is very important for growth prospects and expense management for US companies.
The second is the use of Department of Government Efficiency (DOGE). DOGE has been up and running (we remain neutral on this, but they have admitted “mistakes”) and is designed to trim wasteful and non-prudent government spending and to reallocate funds towards lowering debt expenses and into the hands of taxpayers. Constant growth of bureaucracy, government expenditures and debt are unsustainable. The former Prime Minister of Britain had publicly agreed that every country in the world would benefit from a DOGE.
Thirdly, the US is already ramping up energy production (through deregulation and opening up additional sites – “drill baby drill” is the mantra), all in an attempt to lower costs and inflation. Energy costs affect the prices of many items and services, especially fertilizers and food production.
In addition, the White House and GOP Congress is looking hard and fast at a new tax bill to quickly (and significantly) lower taxes on the middle and lower classes, while potentially increasing tax rates on top income brackets.
Lastly, a popular speculation is that Trump wants to purposely push financial markets down, and as they decline, then bond prices also drop (and they have thus far). These conditions create an opportunity for the US to renew the government debt, which currently costs $1.2T per year, at lower rates (similar to a decrease on your mortgage rate), again reducing government costs and debt to allow for lower taxes. As a result, that may also mean that the USD currency will decline to makes US exports cheaper to foreigners (even with the tariffs) and increase sales of US based companies.
We expect that changes will come fast as everyone adapts to the new environment. General Motors (GM), for example, has already announced Thursday that they will be increasing production and adding new jobs to deal with the import issues, which is already positive news for Trump.
All in all, there is significant long-term upside for the US, but it is also a large gamble on Trump’s part. Other Presidents have tried, though to lesser extents, and have not been successful. We shall see.
There is no doubt that this will be rough for Canada and for the rest of the world. The sooner negotiations can begin, the better chances for a resolution, but it may take some time.
In the meantime, Canada has its own problems, such as a persistently weak economy and a weak Loonie. We have not seen any real growth in Canada for a long time. Job numbers released today in Canada were much worse than expected, and whether we like it or not, we are seen as a commodity country, and that sector is one of our best opportunities for growth. Yet there has not been allowances for exploration, pipelines, energy, LNG or transportation in years, nor have there been any incentives in place for business and manufacturing (although we saw a recent announcement for a trainline from Toronto to Montreal. Perhaps a last minute push before an election? Though probably not what is needed for industrial and manufacturing).
Canada, like most countries, also has the same growing bureaucracies and government expenses. The largest growth in jobs in the last few years have been in the public sector rather than private. We have all heard the auditor general come out with news of questionable spending year over year. Canada, surprisingly, also has its own internal tariff issues between provinces. If alleviated, this could save billions of dollars for Canadian businesses.
We hope these items all get addressed with the next federal election. They could go a long way to relieving some of the stress caused by the global tariffs.
Until then, we continue to be overweight in US assets for any equity positions we hold. They will likely be the biggest beneficiaries of the negotiations in the longer run. As for fixed income, we continue to focus on Canadian bonds as interest rates are expected to continue to decrease, and as rates drop, the value of fixed income increases. We anticipate that interest rates will continue to decline faster in Canada as our economy is significantly weaker than the US.
As mentioned, markets are looking to be down again on Friday, but as we note in our charts, the overnight bottom hit close to the lines of the lows of August last year. That is important, because those lines are what the computers are looking at. They see that as strong “support and structure” from going down further, and it is important to remember that computers still control over 80% of the trading. This is a potentially good sign because while markets are looking oversold (from yesterday and today), we may have actually seen what is known as “Capitulation’ and the bottoming of this short to medium term correction. We will be patiently watching our Price Action Charts for signs of a turnaround. Again, our adage has been that we would rather miss some upside than catch more of the proverbial falling knives.
We are still in the Green Zone in our longer term Equity Action Call / Stoplight. Even though we are well into the Yellow and Red zones in our shorter-term signals, this still looks like a typical correction similar to the 10-15% correction we saw last fall, only to see markets turn higher and close the year end on a strong note.
We would like to emphasize that while we are not taking a political position on any of these plans, tariffs, elections etc., it is our fiduciary duty to closely monitor and understand the potential implications on our model portfolios and utilize our indicators and signals to invest accordingly.
We had already reduced exposure to stocks going into the tariff news, and in light of the pullback, we continue to do so. As of the close of Thursday, we are now about 35-40% in cash, 20%-24% in gold and the rest in stock in our Equity component of the portfolios. Should we go into the Yellow or Red Zone longer term, the stock allocations will be further reduced. When markets eventually rally, we will have the power to move back in and take advantage of the upside.
Should you have any questions regarding your portfolios or planning, or if you would like to meet in person or by phone or video conference, we are always pleased and ready to do so.
Regards,
John, Victor and Megan.