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

Geopolitical Events

The question is should you play these things? If you a oriented to being a short-term trader, days to weeks, he has no issue on speculating around these geopolitical events. When there's a major event, you shouldn't ever really do anything radical to your portfolio like sell everything and go to cash. In the long run, that would really hurt you.

This current Iran-Israel conflict is a little bit different. He's brought in a graph of the US budget. At its peak in the 1980s (the Reagan years), military defense expense was 28% of GDP. During the Clinton years, a lot of money came out. The biggest line item in the US right now is social security. 

Trump says the US is done policing the world, and other nations are going to have to pay a bit more. Congress pushed back a bit on support for Ukraine, and he suspects they'll push back a bit more on more money for supporting Israel.

During the pandemic, defense spending dropped to its lowest share of federal spending. Since then, it's started to go up again. Could be a trend. Seeing a lot of this around the world, even here in Canada. Relative to the US, most countries' spending levels are pretty benign. 

The biggest thing here is the US deficit of $37T, and it's choking them. This "big, beautiful bill" is going to add to that. Money has to come out of the budget, and one of the areas could be military spending.

Look around the world at countries that spend the most in terms of military. North Korea is up at the top. What's interesting is that the Middle East and parts of Northern Africa are ramping up. He thinks this is for the protection of energy infrastructure in those parts of the world, and that's costing a lot more money.

When the Russia-Ukraine war started, all the excess oil that was going to Europe rebalanced over to Southeast Asia and Australia. So that part of the world doesn't want to see oil prices go up either.

If you want to make a trade and play the geopolitics of what's going on in the Middle East right now, and if oil prices are going to go up and persist, overweight oil drillers and energy names. XOP is an ETF that plays a broad number of oil drillers. Gold might be another one to tilt towards. We're not seeing a flight to safety in either the USD or US treasuries.

Don't sell everything and go to cash. Rebalance your portfolio or make some trades.

We are navigating short-term political shock. Oil is going up due to possible shortages and there are possible supply change issues. The Nasdaq is up this year with with cooling inflation and momentum in the U.S. markets. The TSX continues to outperform with strength in the gold and materials sector along with energy and industrials. The market is pricing in further rate cuts and she is cautious for some volatility, She is maintaining exposure to secular growth themes such as AI and Health. The stock market and economy can move in different directions.

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Geopolitical risk is always there under the surface. The thing is, Iran doesn't have many friends. Both Assad and Hussein are gone, Hezbollah has been smashed, and Hamas is under ongoing attack. So geopolitically, doesn't think there's a huge risk here. The US is pretty dominant in this area.

Trying to predict Trump is like trying to use a Ouija board. You just don't know, and he sometimes wonders if Trump really knows. In markets like this, it's very important that investors know what they're going to do. He often says that he doesn't know what markets are going to do, but he knows what he's going to do in different types of markets. You need to have a strategy if the market drops 5%, for example. For him, he ignores it. At 10%, he starts paying attention. At 15%, he starts adding back in. At 20%, he adds another 5%.

Look at your asset allocation risk tolerance (and understand what it means), and make sure you have good-quality assets. If markets decline, you can be reasonably confident they'll come back and it gives you a great opportunity to buy more.

The last thing you want to be doing is buying into a market that's at its highs for fear of missing out. The other bad thing is panicking and selling when markets are down. It's the old buy high, sell low; exactly the opposite of what you want.

When he hears this, he immediately runs for the exits. The risk on this is just too high. It's a real factor in terms of markets and currencies, but it has too many issues.

There are some products that combine the two, but he's found that sometimes they go and change the asset allocation. He wants to be in charge of that. He'd tend to go instead with an equity ETF and a separate bond ETF.

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Two months ago, who would've thought we'd be at record highs for the TSX, with the S&P up ~20%, NASDAQ up ~28%? The S&P has rebounded nicely, a little more in fact than the TSX since those April lows. The S&P has had a really great run, and trying to reach those all-time highs again (we're 2% away) is a bit tougher. Compare that to the TSX, which has lagged the last couple of years.

Yes, he thinks so. It looks as though they have a deal in place, pending final approvals. All eyes are on that, and we'll see what happens. Some other countries still need to reach agreements.

Recession fears are easing, inflation numbers are cooling to a certain extent, and the labour market is very steady in the US. That economic backdrop is still strong, and that's what's carrying the markets these days.

He is moving a little out of the US and TSX, simply because he sees valuation discounts outside NA. So he's looking at European and international markets. An uncertain US dollar helps those markets in terms of investment. Falling interest rates outside NA also helps.

He doesn't look for particular countries or regions, he's more company-specific.

Reality is that, off the bat, companies are working hard trying to eat some of the tariff costs. The questions are how long will tariffs be in place and how high will the costs be? Ultimately, companies will have to assess that.

Inflation is still pretty sticky, though it could moderate. For those who want rate cuts, moderating inflation in the near term is positive. That's going to be a bit tricky. Over the last few months we've seen an uptick in commodity prices, and that will start feeding through into the inflation data. Energy prices, for example, have started to tick up again. 

The market's signalling that inflation is still a concern, because inflation-oriented assets are outperforming. He doesn't see any change in that.

It's interesting. For all of the people who are concerned that tariffs are going to slow things down, the signalling from the market has been quite different. Think about where leadership is. Financials continue to lead, especially the capital markets banks and investment banks. Also seeing strength in industrials in general, which sort of belies concerns about the economy.

When you look at defensive sectors (consumer staples, REITs, bond proxies), there's no sign of any relative strength or performance there. If things were slowing down, you'd expect them to pick up. 

We're in the middle of bond auctions, 10-year today and 30-year tomorrow. Longer-term yields have been building in a bigger and bigger premium for the term that money will be locked up. Again, that speaks to the risk that governments continue to spend and rack up more debt. 

So more inflation-oriented assets are performing well -- basic materials, gold in particular, uranium, fertilizer stocks. Those don't point to a deterioration in the economy.