♫ It’s the holiday season! ♫
The markets are already looking quite festive! As we mentioned in our November e:Newsletter, we had expected to “load up” going into the election and that we should see the markets rise on the simple fact that investors will be happy the long four-year election process is over. We also anticipated and still do, that markets will continue to have upside heading into the year end with the typical seasonal rally. A good sign in the short term is that we are seeing the tech Magnificent 7 stocks trade strengthening once again. More importantly, there are indications that the small to mid size companies as well as financials are taking part in this move to the upside. That is an excellent sign of broad market strength. In all, we are well in the Green Zone, with all our relative strength indicators flashing positive and our technical charts are seeing higher highs, and higher lows. We look forward to the Santa rally!
We saw a fairly decisive election result. It looks to be leading to a peaceful transition. Markets were pleased not only that it was over, but also that the Republicans won given their stance towards lower taxes, smaller government, less regulations and generally pro business. Some of the counting for the congressional seats is still going on, but it looks like the Republicans will control the trifecta of the Presidency, House and the Senate. That is something that we had highlighted as a possible concern going into the election because it means the party in power potentially has carte blanche to do whatever they want to do without the checks and balances of the other party to restrict or at limit changes. Markets typically do not like change and prefer a government in a position of stalemate instead. That said, the majority in the House of Representatives will be a very slim one. That may give investors some comfort that we may see some forced moderation or even upsets to policy more extreme initiatives.
Surprisingly, investors have not balked at the results (at least not yet). It will very much be a wait and see approach on what the new administration will actually do come January 20th. It is very likely the policy will come hard and fast.
As for the outlook: it will be All Gas – No Brake and more than just a bit of the unexpected. Here is a synopsis of what we are likely to see. There are a few main policy priorities that we and investors will be watching:
All Gas, No Brake: Expect the Unexpected. Presume nothing. Even with that hedge, the sheer velocity and torque of the Cabinet nominations and "policy via Tweet/Truth" is without precedent.
We suspect Trump is perfectly comfortable being a policy paradox and pushing competing policies (and people); this "chaos premium" only increases his leverage in negotiations and keeps him at the molten center of the global policy zeitgeist.
Recall the Highlander (movie) Principle: there can be only one! Trump trumps everyone else and he will decide.
The range of policy outcomes is probably as wide as it has ever been — we are not preordaining any of them, but the right and left tails here are massive.
5 Lens in Which To View Trump Policy Actions. Some decisions or nominations will fit entirely in one lens, whereas others may share components and/or compete. Such is Trump 2.0.
Hyper Deal Making
America First/Builder
Projecting Strength
Contrarian/Disruptor
Grievance/Retribution
4 Main Trump Policies. We count at least four core policy priorities for the incoming Trump Administration — 3 of which can be done largely without Congress:
Deregulation
Renegotiate trade deals (under threat/imposition of tariffs, which remain the primary policy lever)
Largest deportation effort in US history
Extend/cut expiring individual tax rates (need to lock-up GOP House)
On January 20th, many expect that Trump will declare a national emergency at southern border and thus free up funds for Border Wall, as well as trigger the International Emergency Economic Powers Act (IEEPA) over the bilateral goods deficit, which grants Trump broad tariff powers.
On Tax: This is not the Capitol Hill of 2017. Trump will have Congressional leadership in his corner and a core MAGA base on Capitol Hill. Margins will matter though, and reconciliation requires discipline, coordination, focus & agreement — on the entirety of the tax code.
We also expect Trump will move quickly on pushing for the end of the Ukraine – Russia and Israel vs Hamas wars, even though the Russia Ukraine war escalated recently and the ceasefire in the Middle East is shaky. How he will do that remains to be seen but all sides are already anticipating some sort of immense pressure and look to be open to negotiations.
As we mentioned above, one other big difference from 2017? House margin. GOP had 18-seat margin; zero-seat margin in Q1 2025.
We reiterate that the bottom-line message, again, is “All gas – No brake”. Trump and his team will move hard and move fast. For us, that means we will have to watch our charts and positions rather closely for market and investor reactions in either direction. Should markets pause or pull back prior to January 20th, we will probably look to add at least some defensive posture to the portfolios. It is, however, important to note that even given all these considerations and expectations, markets remain strong.
A more immediate concern for Canadians is the talk of the 25% Trump tariffs. Canadian markets pretty much shrugged it off. We provide the following comments from Robert Kavcic, Senior Economist.
“… Meantime, the TSX added 0.8% with strength in technology and health care countered by declines in energy and materials. All the talk was around the threat of a 25% tariff on all U.S. imports from Canada, and the economic impact that would have. While there was some response in a few pockets of the equity market—e.g., auto parts and aerospace among some others—the impact on the TSX more broadly was muted.
New tariffs would be set against a backdrop of firming domestic demand in Canada in areas like housing and consumer spending, but that momentum would be countered in a hurry. We judge that the net impact on real GDP growth, without retaliation, would push above 1.5 ppts on a quarterly basis, and could carve 2025 calendar-year growth by roughly 1 ppt—we are currently at 2.0% growth for 2025 and 1.9% for 2026. While the direct tariff impact would be significant, we’d also see some offsetting stimulus from likely looser fiscal policy, more aggressive Bank of Canada rate cuts and a weaker loonie.
For more detail, check out last week’s edition of Focus where we grind through the potential impact on economies in Canada, the U.S. and Mexico.”
Our teams’ view is that the tariffs for Canada are mostly bluster for future negotiations like we saw back in Trump’s last administration. Our biggest trade with the US is in oil and autos, and because those two items cross the border back and forth so many times before there is a final product, it is difficult to tax them. We believe that the more the protected industries like dairy and lumber may have larger concerns. Also, we consider the more immediate task at hand for Trump is dealing with the immigration and fentanyl issues, and that is more to do with Mexico and China than Canada. It is again for this reason that Canadian markets barely moved on the news.
We look to the U.S. for the take on interest rates and inflation as they have the biggest impact on our portfolio. Many had thought rates would be coming don faster than they have, but inflation remains sticky, and the Trump tariffs may again exacerbate an inflationary environment. The latest comments from the U.S. Central Bank Fed Chairman Powell kept the hope for rates to drop alive:
"…not quite there on inflation but still making progress, and therefore remains on a path to bring rates back to a more neutral level over time. However, with the U.S. economy in very good shape, policymakers can afford to be a little more cautious in restoring rate neutrality.”
Also, with U.S. rates remaining higher and with the potential tariffs concerns, the US currency remains attractive while the Loonie continues to languish, much to the chagrin of the snowbirds. The Loonie, as of writing, is sitting at $1.4072 USD/CAD. This is about the same line as its lows of late 2016 and early 2020. From a technical point of view, it has held that line. The higher probability is for it to hold within a cent or two range from here before we see a real bounce. The lower probability would be a failure to hold, which could see the USD creep up to $1.46 USD/CAD or even the all-time high of $1.62 USD/CAD. We do not see those as likely scenarios.
Our portfolio holds significant US assets, but the currency is not an issue as they are mostly hedged. As such, we are currently agnostic from an investment perspective. Over the longer term, the USD is usually in decline when stocks rise as money moves away from the safe haven. This occurred in Trump’s first term before COVID hit. Should this term be relatively successful, and should U.S. rates decline as we expect, the market will continue to move higher, and the USD will decline, allowing the Loonie to fly once again.
We are in the Green Zone and all indicators are positive. Even with all the concerns on the new Trump Administration, the geopolitical concerns and inflation, markets have not rolled over. That is very important. As we have said many times, markets that do not decline on bad news are strong markets, and this is firmly cemented by market seasonality. As our own Russ Visch, BMO Technical Analyst, commented: December is “still one of the most consistently positive months of the year for the US at 74% though with an average gain of 1.48%. i.e. - the odds still favour an "up" month this year. It's even more consistent here in Canada where December is the strongest month of the year with an average monthly gain of 1.49%, and positive 80% of the time. We are in the "sweet spot" in the calendar and that remains the case all the way to February.”
We would like to reiterate that with respect to the news from the south regarding Trump and his manner as well as his picks for the cabinet and what he will or won’t do, we would consider all of it to be just noise. Go back any year or decade - there is always noise. Our strategy allows us to follow the discipline of our matrices and charts to drown out the distractions and emotion and separate it from the market. We simply need to look strictly at what the price in a market or security is telling us and not the newsfeeds. Most importantly when the facts change, and they will, we change as well. We do not buy and hold. We do not need to be invested at all times, even in times of weakness. We have a strategy that provides us the indicators and the ability to move instead to the strongest asset class. That includes cash if need be.
We currently remain fully invested but continue to watch our charts closely for any rollover in the trend. Barring any major catalysts, we expect to see the markets rally throughout the holidays and into the new year.
Should you have any comments, questions, or concerns regarding the Monthly e:Newsletter, your investment portfolio or financial plans, or if you would like to meet, whether it by phone, video conference or in person, please contact any member of our team anytime.
We wish you and your families all the best during the holiday season! For those that celebrate, also a very Merry Christmas, Happy Hanukkah and to all, a Happy, Healthy and Prosperous New Year!
Best Regards,
John, Victor & Megan