Canada’s famous prognosticating rodents were split over spring’s arrival on Groundhog Day. Ontario’s Wiarton Willie reportedly did not see his shadow on Sunday morning, which is good news for people who are tired of wintry weather. However, Nova Scotia’s Shubenacadie Sam and Quebec’s Fred la Marmotte both saw their shadows, predicting a long winter ahead. Meanwhile, in the U.S., western Pennsylvania’s Gobbler’s Knob, the famed prognosticating groundhog, emerged from his den and saw his shadow, and that means Punxsutawney Phil has unfortunately declared six more weeks of winter.
The back and forth sounds eerily like the pundits that are split on the markets. We had a number of calls and emails going into and over the past weekend. Many were, and still are, worried about what the Trump administration is going to do. Others pointed out that the market has had a long run and is due for some sort of correction. Without trying to minimize any concerns, nor to be condescending, we provide the following comment from our Chief Equity Strategist, Brian Belski, regarding the current market state and investor sentiments:
Well, I believe that most investors and most people for that matter are scrolling headlines on their phone or reacting to bullet point analysis, instead of taking two steps back and taking a breather. So I think, essentially, if you're parents out there, one of the things that you teach your kids in elementary school is, if there's a fire, you stop, drop, and roll, stop, drop, and roll. So that's my advice with respect to the market, stop, drop and roll. Do not react. Act and employ a discipline. And so, the more fundamental that you are, the more that you will win. And in fact, the market became more fundamentally biased as the day progressed. And actually, the TSX opened 3.1% lower on the open, that was the low for the day, and it actually closed up for the day. So again, stop, drop, and roll, employ more of a discipline, and really use fundamentals. And that's what's kept us to remain calm and disciplined…
Markets have held up very well. They initially dropped, but held their lines well and reversed right back up. That recovery was after some very positive and above average returns last year and so far this year. Fortunately, we don’t follow the myths of the markets nor the news. Remember that bad news sells and the talking heads on CNBC and BNN or the mainstream news need to keep you tuned in. We would rather have a strategy that tells us where the market is today and the probabilities of next moves, to hold the strongest positions and let the winners run. Technical analysis follows price and takes in all the fundamental information, the economic news and the investor sentiments to give us the opportunities to move in either direction.
Right now, the indicators, including our Equity Action Call (Stoplight) and shorter-term channels (Footsteps) are all still in the Green Zone. The Price Charts are showing the markets are holding amidst the volatility of the political concerns. Defensive stocks like staples (the things we need everyday no matter what) did not take a real positive jump at the beginning on Monday like one might have assumed if the markets were going to weaken. The volatility index also did not increase to our concerned levels and even gold did not make a big move.
Those same pundits continue to push the bad news because it sells. The last couple weekends it was the Artificial Intelligence from China - DeepSeek issue. Last weekend, it was tariffs. This weekend, who knows. Probably the Middle East? But all that bad news has failed to push the market down. And markets that do not go down on bad news are strong markets. Indeed, these continue to be resilient, even strong markets.
Although we will be cautious here, we remain pretty much fully invested in both our fixed income and equity components and continue to perform in line with or better than the markets so far.
Within days of his one-sided election victory, Donald Trump reignited trade tensions, promising tough tariffs on Canadian imports and referring to Canada as the “51st state.” While the rhetoric grabs headlines, the bigger question going into last weekend was where might these threats lead, and how were we prepared to respond?
Trade tensions between Canada and the US are nothing new. From the beginning of Canada’s Confederation to NAFTA and USMCA, our economic relationship has evolved through decades of disputes and agreements. Yet, despite lumber wars and political theatrics, our shared economic prosperity endures. Trump is nothing if not unpredictable. While pundits and market watchers scratch their heads over his recent salvo, here are three potential “outcomes” as we see it:
Trump does all of it. Trump’s transactional mindset, famously outlined in The Art of the Deal, suggests he likes big wins. Massive tariffs on Canadian goods would fit this narrative, but such actions ignore the deep integration of our economies. For example, a single car part can cross the border up to seven times during production. Untangling this relationship would be far more complicated than Trump’s rhetoric suggests.
Trump does some of it. Tariffs might be more nuanced. While Trump highlights a trade deficit with Canada, removing energy and minerals shows a US surplus. To avoid political backlash from higher gas prices, energy exports might be spared. Instead, tariffs could target sectors like electronics, machinery, and chemicals - likely at modest rates.
Trump does little or none of it. Trump might back off considerably if he gets the Canadian policy concessions he wants. This might include an increase in NATO spending to meet or even exceed the 2% of GDP contribution target (Canada is one of only a few NATO allies falling short) and improving border security to stem the tide of illegal immigrants and drugs.
In our view, we are likely to end up somewhere in the middle. There is an element of showmanship taking place, but Trump’s own advisors, not to mention a parade of Canadians who will be lobbying governors, state politicians, and US CEOs, are likely to head off drastic action. Further, any tariffs may be applied gradually, or not until months after they are announced.
We could see energy and the auto industry escaping tariffs, perhaps a modest tariff on less critical goods, and, in true Trump style, maybe a symbolic victory or two, such as adding tariffs to Canadian milk (which mostly does not go to the US anyway) or canola (which is in the crosshairs of RFK’s MAHA initiative).
By the end of Monday, the tariffs were removed, at least temporarily. Trump did indeed get what he kept saying he wanted, which were concessions to stop to the fentanyl and illegal immigration coming across both borders. They will reassess in March or April. Subsequently, markets rebounded and volatility subsided quickly.
Inflation in the U.S. continues to be sticky, and interest rates will likely not come down there as fast as many originally expected. That said, they are still in a decreasing trend, and if Trump has his way, the rate cuts will happen sooner rather than later. We instead look to the bond market, where bond yields have been dropping, confirming real rates are actually coming down. We watch the “bond boys”, and they are not worried about the rates or market at the moment, and when they are not, neither are we.
In Canada, interest rates will need to come down quicker as our economy is much weaker, and with an election months if not over a year away. Under the British North America Act, the Liberals could extend an election until October 2026. The currency versus the U.S. will remain weak. Should some sort of tariffs return or talk of something like a U.S. GST on incoming goods, our dollar may remain weaker for longer. As such we continue to focus on U.S. Assets and or dividend paying Canadian assets where appropriate.
We are in the Green Zone in our long-term indicators and short-term charts and the portfolios are modelled accordingly. As always, we are ready and prepared to make changes, cut the losers and or go on defence (including to cash if needed).
Should you have any questions or concerns, or if you would like to review your investment or financial plans in person, via telephone or video conference call, we are always pleased to do so. Please contact us anytime.
Best regards,
- John, Victor & Megan