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

Tariffs would be like a supply shock. What could happen is stagflation (high inflation, but slowing economic growth) which no one wants. 

From a monetary point of view, when there's high inflation central banks start raising interest rates to slow demand. But at the same time this erodes purchasing power, which may slow economic growth and increase unemployment. Usually when unemployment is rising, you cut interest rates. The central banks are dealing with that dilemma right now.

The Fed minutes came out yesterday, and they appear to be in wait-and-see mode. Inflation does appear to be stickier in the US than in Canada, but there's a lot of uncertainty surrounding tariffs. Canada's inflation has come down quite a bit, so our central bank has been cutting rates much more rapidly. The overall US economy is healthier than Canada's.

They're off today, but all indices are near record highs. The S&P 500 reached a new high a couple of days ago. Even the TSX is up 2-3% YTD. This tells her that the financial markets are thinking that tariffs won't be fully implemented. If the tariffs were to be fully implemented, it'll be very bad for the Canadian economy and our stock market will eventually be hit.

So the markets are thinking that the tariff threats are a negotiation tool, but we'll have to see how it all plays out.

Could be just because they've done so well. Valuations are stretched to the higher end. Might also be uncertainty as to impact of tariffs. She read an article about some companies waiting for IPOs, as they're unsure how receptive capital markets will be. One-year returns are up 40-50+%. Nice rally post-election on promises of less regulation. 

Obviously, Canadian market valuations are a bit lower because we have a weaker economy here. In the US,  however, valuations are at almost two-decade-level highs. We have to go back to 1999-2000 to see these types of elevated valuations. Some of that is driven by the tech sector, which has seen really strong results, but even the forward-looking multiple on the broad S&P 500 is 22-23x.

That, combined with all the uncertainty, tariff risk, and general unpredictability of the Trump administration, gives him pause on the US market. He's not calling for a huge correction necessarily, just that it makes sense for investors to be more careful where they're allocating capital. Perhaps look for value-type names trading at lower multiples and predictable cashflow.

Right now, he tends to favour the Canadian market, which people are down on. Thinks we might be at the maximum point of pessimism as it relates to the Canadian market.

Valuations are low in Canadian equities. Canada is somewhat likely to get a new federal leader, and deregulation and tax cuts in the US are going to force Canada into somewhat more business-friendly policies. 

Investors really need to analyze each company case-by-case. Businesses that are purely domestic shouldn't be impacted by tariffs. Businesses to do with the auto sector are potentially very exposed. There are other Canadian companies that have revenue, people, and facilities in the US; they aren't actually exporting goods from Canada, so it makes them less vulnerable to tariff risk.

It is. Don't look so much on the chart and the share price, but focus on the business fundamentals and valuation. If the fundamentals are good over the long term, and valuation is cheap, it's usually worth hanging on to. 

The S&P is hitting a new high today, but it's on low volumes on a vacation week. Point is, money is not coming in off the sidelines and won't sell either. Rather it will wait and see. Meanwhile, we will see atrophy. This isn't about left or right politics. He needs to see a clear path forward--stability--so he knows where the economy is going. He's spoken to private equity, CEOs and bankers and they're all flummoxed--where is this economy going?

We had euphoria after the election, but now we're running into a reality where investors are asking what is going to work and who will it work for? Which sectors and industries given the change we see each day in government (i.e. federal agencies). People are worried and concerned what might happen and this is weighing on stocks. Yes, the S&P is hitting a high today, but the market momentum is fading.

Breadth of the rally has expanded this year, but it has slowed. Trump's tariffs are a negotiating tool, but the market has seen 16% earnings growth vs. 12% expected, and a 77% beat rate in earnings. The market has digested last week's hotter than expected inflation numbers. The market is a mixed bag now, but he's overall more bullish.

Market Update:

The TSX Index was up 3.26% in the month of January, up 3.26% YTD and 3.71% over the past year. Canadian GDP was up 0.3% in the fourth quarter of 2024 and 1.50% for the full year; in the USA the GDP was up 2.5% for the fourth quarter and 2.50% for the full year. Canadian inflation rate was 1.80% annually in January 2025 and the US annual rate was 3.00% in January 2025. 
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Some companies will do well, with or without tariffs. Tariffs are largely on goods, while 80% of the Canadian economy is services like Descartes and TD.

He feels that Jevon's Paradox may apply to lower AI cost structures which will promote demand and benefit large cap tech companies. There is an open door for the substitution for software and semi-conductors so it could be more challenging for large tech when people have more versions available.

Believes lower interest rates will help prospects of Canadian REIT sector. Falling rates will mean less interest expenses for real estate companies. Seeing lots off opportunity in office space market. Expecting market trend to reverse as more people return to working at the office. Doesn't see a sharp recovery, but will see a gradual recovery. Good time to buy cheap REIT stocks. Even with a hybrid working model - demand will continue for "in person" meetings. 

Threat of Tariffs:

The past month, as the U.S. has been threatening and imposing tariffs on countries including Canada, we have been inundated with questions from our customers about tariffs and trade wars. Investors are wondering if they should sell their Canadian stocks. At the same time they worry about U.S. protectionist policies on U.S. assets, even going so far as to wonder if U.S. securities held by Canadians could be seized if things go the wrong way and the U.S. wants to exert more trade pressure on Canada. So, if selling Canada and avoiding the U.S., where should investors go?

First, as usual, our best advice is not to panic. This is not the first trade war. Stocks globally have survived dozens of such events. In addition, Canadian stock markets have had multiple months now to factor in worries, and stock valuations have adjusted somewhat. We certainly would not advise wholesale restructuring of portfolios on the possibility that something might happen. U.S. tariffs on Canada have already been delayed. They could be delayed further or reduced, or they may not happen at all. It is a moving target, certainly.
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