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

A diversified portfolio should have exposure to US banks, as the US is such an important economy. She tends to focus on large-cap banks. She expects consolidation in regional banks. Sector would benefit from potential deregulation and increased M&A. We'll have to wait and see how tariffs affect all the Trump pro-business hopes for the sector.

Most large caps reported last week, and results were quite good. But that was before all the tariff turmoil. Strong trading activity in Q1. Banks have pulled back on tariff uncertainty, slowing economy, greater loan loss provisions. See her Top Picks.

Markets are falling declining in part because Trump is bashing Fed Chair Jay Powell, but also because of tariffs, tariffs, tariffs creating uncertainty. Trump's policies are inflationary, worsening things for the bond market and overall economy. You need 100% an independent bank, but Trump wants a Fed chair who will do his bidding. The reality is we're likely heading to a recession, likely catalysed by Trump's tariffs. He better start talking fast about deregulation and better tax rates. Now, he's after more revenue to pay for those. Trump's style of leading could be with us for a while; historically, trade negotiations take 18 months. Until there is clarity, CEOs will be cautious and defer decisions, which would be good for the economy, but are on hold. What will change Trump is the Republican Congress are worried about losing the midterms and pressure Trump. No doubt, we have a hard economic landing coming.

An analyst produced a chart showing all headwinds to the US economy are related to tariffs; he predicts a 90% change of recession, caused by tariffs. During Trump I, his tariffs were up 2-3% and the economic impact was -0.25% to -0.33%, but the current tariffs are way larger, so he predicts a -4% GDP impact. Also, earnings will be downgraded constantly for 6 months, leading to 4,200-4,800 fair value on the S&P. More downside will come. Further, it takes 18 months to sign a trade deal and 45 months to implement on an historical average. This will matter in the US midterms elections when Congress has had enough of this and the Republicans fear losing control. Small businesses make up 85% of capex and 75% of the labour force; sentiment skyrocketed after the election, but plunged last month when tariffs hit. Small business is the heart of the American economy. Trump has to start talking about lower taxes and regulation.

Expect a debt downgrade. Could be a constitutional crisis if Trump tries to fire Jay Powell. And earning won't matter this earnings season, because tariffs will continue to dominate markets. This is the Walmart White House: we're getting everyday low prices. This is a man-made crisis, so it will go away, but not until the market tests lower levels. However, the US is not a safe haven as other countries appear safer. Jay Powell deserves better.

Questions to ponder during tariffs threats: How did my company do in the last recession?

There have been many more recent market events, such as COVID-19, the mini-crash of 2018, and market events of 2022. In Canada, the pandemic did cause an official recession for about 14 months. But because the market bounced so fast, we would prefer to look at the Great Recession of 2007 to 2009, including of course the financial crisis. This data can be hard to come by, but many, many companies still managed to grow their earnings during this period. Sure, their stocks still fell, but from a fundamental basis business continued and cash flow grew. Now, for those worried about recession, we would look to see how your companies performed in this historical period. Look at earnings, not stock prices. Pretty much every stock declined then, but the companies that could stay profitable were “safer” and their stocks tended to recover faster.
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We're through the worst of it. It may go lower, but the downward curve will level off. He's recommending that clients gradually accumulate over the next few months. Have we seen the bottom? Maybe, maybe not, but we're close. 

Trump's behaviour is not predictable, but it is predictable in a longer-term sense. He makes all kinds of noise, and then settles for something that's quite reasonable. We saw that with the USMCA.

He had a few investors take assets out of the market earlier, which turned out to be a good move for them. But in his experience, it's better to have time in the market and not try to time the market. Timing involves two decisions -- when to get out and when to get back in. It's a difficult call, and you can miss the bottom.

His income fund is yielding 6.5%. If we have a recession, yields are going up and you'll make money investing in high-dividend-paying stocks like banks and insurance companies. These areas are not particularly vulnerable to a recession in the short term.

New investors should be cautious. You'll make more $$ over 5 years going after the big global growth stocks. But we can't tell exactly what'll happen over the next 6 months.

When he actually sits down with countries and hammers out a deal, it's often not far from where there were to begin with. These deals will be made. China's the tough one, but the most important, because it's looking to possibly replace the US as world leader in a couple of generations. 

China's also the world's biggest exporter. The US is a big customer, so China can't turn its back on the US totally. 

He had been leaning more toward there being a cut. But it's not a surprise; bets were about 50/50 whether there'd be a cut or not.

If you look at the comments that came out, there's a wide range of potential outcomes -- from lots of inflation to a recession. In the end, the backward-looking economic data, such as inflation, looks reasonable. But the forward-looking data, like unemployment, doesn't look good at all.

He thought there might be some more weight given to the employment situation, given the uncertainty created by US trade policy. The BOC, consumers, and businesses are all dealing with uncertainty and that forces people to sit on their hands. A bit of relief on the interest rate side might help to provide better economic support.

He thinks so, when you think about what goes on in company boardrooms on capital budgeting. With so much uncertainty, how can you bring up a massive project for approval or invest in more people? Forces everyone to sit on their hands, as there's really nothing you can do. In fact, you're seeing companies go the other way with some layoffs.

Need a lot more certainty before you allocate capital. In the meantime, it's wait and see, which doesn't help the economy. 

The #1 question in this scenario is time horizon. If your time horizon is really short, investing in stocks doesn't make sense. If you look at market data, the odds of losing money in the stock market after 5 years is almost 0. So buy things that are undervalued with a time horizon that allows you to stick in there. 

This came up more in the past when GIC rates were really high. If you own a GIC outside of a registered plan, that's 50% tax. So your 3% on a GIC is instantly halved to 1%, below the rate of inflation, losing purchasing power. If you have 3-5 years, use this volatility to focus on some great compounders. This can set you up for a very long time if you buy right. In 5-15 years, you can really grow your money, and that's where the GIC argument falls apart. See his Top Picks.

Both segments will be affected indirectly by tariffs. They each provide a service and, while you can't tariff a service, tariffs will affect the economy, which impacts financial markets, which impacts life insurance and asset management.

Questions to consider during tariff uncertainty: How much debt does the company have?

It’s easier to understand how a company with no debt has a better ability to survive than a massively leveraged company. Balance sheet strength is important, always. But in a period of recession, when business and cash flow slow down, it becomes even more important. In a period of stagflation, where interest rates might rise even as the economy slows, balance sheet strength becomes even more crucial. The last thing you might want to own is a company laden with debt while rates move up. So take a look at the financial strength of the stocks you own. Obviously, a company with no debt and billions in cash on the books may be a safer bet than others. And, these companies do exist: a recent Bloomberg data screen notes 2,917 companies in North America with no debt at all.
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