A Comment -- General Comments From an Expert (A Commentary)

He's diversified globally. In a 30-stock portfolio, he'll have 4 Canada, 13 US, and 13 international. We had the risk-off period when all the fear from tariffs was out there. And now we've had this big market rally back, given that they want to reduce tariffs. The moral of the story there is that you cannot time the markets. So don't be sitting in cash, you have to be invested because of what happened Monday, when we had a 1-day rally of 3-4%.

Be diversified. Whether we get stagflation and rates go higher, or a bull market again with rates going down, you still have to be invested.

It doesn't matter where a company is domiciled, it's where the revenue streams are coming from. Look at the companies, not just at the price.

When you're thinking about buying a stock, you have to answer 3 questions. 

1. Why am I buying this stock? Need to write down 5 reasons why. What do they do, what are the metrics, what is the future for them?
2. What are the risks involved with holding the stock?
3. How does it fit in my portfolio? You want to avoid correlation risk as much as possible.

It gets you through the slow times, the bad times, the down markets, the recessions. Companies that can earn a return on invested capital (net operating earnings after tax compared to the amount of capital that's invested) is a huge sign of how management's allocating capital -- well or not.

There are lots of tools out there for investors to check this themselves -- annual reports and financial websites.

A metric he focuses on. In your own life, if you have money left over after all the bills are paid, you then have financial flexibility. To learn more, the December newsletter on his website explains what they do, why they do it, and why they're not going to change. The March newsletter talks about risk on/risk off, and how investors have to deal with the volatility. Go to libertyiim.com.

Diversification is the most important thing. In a risk-off scenario, inflation and interest rates are rising but stock markets will go down. Interest rates go down, markets go up.

He thinks of himself as a financial contractor -- tell him what you want, and he'll build it for you. Do the financial plan first, and then create the portfolio. Structure, discipline, non-correlation, and diversified throughout the world. Plus bonds. For him, there have to be significant red flags to sell a stock.

Market Update:

2025 has been a roller-coaster year, starting with the surprisingly forward move from the U.S.’s new administration, led by President Trump, that announced meaningful tariffs with various trading partners. This policy led to a meaningful decline across indices, along with tremendous uncertainty regarding the future outcome of the trade war and how this would affect the economy and companies’ earnings. 

As of mid-May, the heat between the U.S. and China seems to have slightly tempered, which led to a market rally across sectors, especially in the large-cap sector, which in some cases has quickly and fully recovered the losses from April. The astronomical tariff numbers that were as high as 145%, made the market turn to panic sell-off mode, are now looking more like negotiating tactics between countries. Although there is still uncertainty regarding the trade war, the trade negotiations are progressing positively, and we think the worst is probably behind us.

Historically, small-cap stocks tend to be the hardest hit and also may take some time to recover. In the current environment of an early recovery, we think investors can still find many high-quality Canadian small-cap names with solid fundamentals in terms of growth prospects and returns on equity, and yet are trading at an attractive discount relative to US peers. With this macro backdrop of easing trade war and a pending interest rate cut from central banks, we think small-caps in general would have room to run to narrow the discount in valuation compared to large-caps in general.
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By now, we know that Trump is an interesting character who manages by chaos, keeping people off balance. Investors must know that volatility will stay during his term, and tariffs weren't the volatility, but Trump himself. Tariffs are the trigger, and Trump the gun. Corporate America came into this Presidency strong and has remained strong, despite all that's been thrown at it. But there's been a drop in confidence among consumers and boardrooms, which hasn't effected earnings yet--and it may not, because Trump keeps swinging back and forth. As of last Friday, 78% of reporting S&P companies reported positive surprises. Valuation is on the mark for a 5-year average.

We don't have a trade deal, but a pause with talks to come. It's complex. Nobody know how this will play out, but he expects a base rate of tariffs everywhere no matter the outcome, around 10%. The markets are comfortable with that level, but it's still inflationary and a hindrance to growth. Animal spirits is driving today's rally; the market did not expect this news. But the news is not a green light to fully jump into the market. Keep an eye on CPI, PPI and retail sales later this week, to reflect April's consumer activity during tariffs that month. Watch Walmart earnings which is a huge trading partner with China. This year, he expects earnings to disappoint and fall short of the projected 8% earnings growth. 

He's looking at ETF charts of economically sensitive sectors during tariffs: transports, logistics and the retail consumer. Also is looking at charts of XPO and Walmart. All these ETFs are still lagging the wider market, despite some recovery during this tariff war. This underperformance tell him these sectors remain nervous. In contrast, Walmart has been a leader, no doubt, outperforming all these sectors. Looking at the VTI index (all US stocks): when this corrected last month, VTI returned to the Dec. 2021 peak. So, the market has had a very good reset and correction. However, it was a challenge to return to its 200-day moving average, though it happened with today's rally. We can close above this for a day or two. If we hold above this 200-day and the VIX returns to around 15, we don't need to worry about these economic headwinds. However, the sectors that have been impacted by tariffs tell a different story. The market has recovered through animal spirits, but we're not free and clear, not a green light. The market could grind higher, though.

We are in a relief rally because of the 90 day pause in tariffs announced today. However in the recent downturn and following rally, insider buying has been very quiet. Even when the market was down by 19%, insiders didn't think it was enough. Retail investors have been doing most of the buying, outnumbering sellers by 4 to 1. The question is how long can this last. He feels today's momentum could last another day or two before a pullback. As to the market in general, 90 days from now we'll know more.

Investing Opportunity: The Market Looks Forward

The average investor is very scared of recessions. The media highlight the bad news, such as declining house prices, job losses and weak corporate profits. Investors know that the stock market is driven by profits, so they tend to worry and sell their stocks when recession talks surface. Certainly, if you lose your job in a recession then of course there is a serious personal impact. While we certainly do not love recessions, they do certainly create stock market opportunities. As noted, when all the news is bad, stocks tend to become very attractive. If you can look beyond the pessimism in a recession, you can see opportunity. And this makes intuitive sense, if you put yourself in the shoes of a chief executive. In a recession, corporate executives get worried too. They fire staff, cut costs and hunker down for the bad times ahead. Then, when economic conditions improve, suddenly profit margins soar because costs are much lower. Yet stocks can be cheap because of all the previous recession concerns. Higher margins and low stock valuations can be a very profitable investor combination.
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Definitely could get worse. We're seeing the early effects of a once in a thousand years president of the US and all its repercussions. 

If you look at Q1 numbers for US companies and what they were projecting for the second half of the year, auto companies all pulled guidance. Same thing with the airlines. Other companies, while not pulling guidance, have said it's really murky for the second half. 

We're slowly seeing the US walk back on all the extreme reciprocal tariffs that they announced on "liberation day". Now we're getting discussions with other countries such as the UK and China. That leaves about 193 countries to go. A long road, but going in the right direction.

From here we should, hopefully, see some stability in the markets.

Critical thing is going to be what the impact is for the consumer. There's going to be a pass-through of tariffs, and it depends on who bears the brunt -- manufacturer, importer, or consumer. Inflation's going to be coming through. Layoffs may tick up.

Then it's up to the Fed whether to tolerate the inflation as a one-off, or to focus on labour, when it decides whether to guide down or not. Jerome Powell really differentiates between his role and that of the government; he sees it as his job to ensure full employment with inflation around 2%. He's not anticipating, but is waiting for hard data, and it's difficult with tariffs in flux. To lower rates now would be putting fuel on the fire, exactly what you don't want.

People will change their stripes as they get affected by different things. Current US president is blowing everything up from defunding research to challenging universities. 

His firm hasn't changed its approach. They look at everything from a bottom-up perspective. They have target prices on all stocks in a concentrated portfolio of 32-33 names. They also have target position sizes; if a stock drops, the team debates whether to buy it up to a full position. The macro is changing; but their method remains consistent, and that's served them well through current and past crises.

Upcoming mid-term elections plus lawsuits challenging tariffs should work in investors' favour. We have to hope that rules will fall into place and we can all move forward.