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

Obviously distressing. From an investment standpoint we have to step back, watch, and understand what's going on. A lot of it is posturing. We know what Donald Trump's playbook looks like, and he's going to take it to a point where the market believes there may be impending doom for our economy. That's when he has the most leverage. 

History tells us that these things are settled, and they're settled for a reason. And that is that both sides are invested, and both sides can be hurt.

Right now, although the media's talking about Trudeau and Trump having  conversations, there are a lot of conversations going on at the lower levels on both sides of the border. The US representatives are going back to the White House, and lines of communication are opening. It's the first day of pressure on Donald Trump to get something done. If there are tariffs, and they're damaging to US companies, US congresspeople and senators are going to be the ones to hear about it from constituents. In turn, the government representatives will use their leverage against Trump, and that will ultimately get things settled.

These are days that we can expect. Markets in 2025 will likely be different than 2023 and 2024. One of the big differences is that we're going to have volatility. We're going to see days where something out of the ordinary comes along and surprises the market.

He and his team love the promise of new chip development and AI development. But he's not at a full weight, as that would be a dangerous investing posture. A whopping 33% of the S&P 500 is devoted to investments in big, mega-tech companies. He sees lots of value in the remaining 493 or so stocks in the S&P that aren't looking at AI.

For more information, you can read the most recent Gauge article under Insights at goodreid.com.

Currency hedging can serve a purpose, he's just not interested in that purpose.

He usually likes to have the exposure to foreign currency. Today, the CAD is quite weak. Possibly there's a mispriced percentage in there. But do you want to speculate and make that trade? The premise of the question is the high USD, but "high" is a relative term. Could it get higher? Yes, of course. Could the CAD get weaker? Yes, it could. He's been around long enough to have seen it at 60 cents.

If you're invested with a portion of your assets in an economy, but you don't like the currency, you should probably circle back and ask yourself why you're actually invested in those companies. A country's economy is the foundation upon which all its companies operate.

Again, you're using currency to make a trading decision. No one can tell the future. Instead, he'd take the US dollars and invest them in US securities. Gives you geographic diversification, sector and industry diversification (as many aren't fully represented in Canada), and access to the historical outperformance of the US economy compared to Canada.
 
If we go back to pre-Trump 2.0 election times, the CAD has deteriorated by about 5%. Is it really worth 5%, over a long period of time, to forego the opportunities that you might have in investing in US equities? He'd say no, but it's a personal decision.

His preference is to buy in the US market. Use the US exposure and its strong economy to your benefit. Our CAD is weaker because our economy is weaker and not growing as quickly. Canada is also burdened with excess regulation, productivity levels are poor. Could turn around, but he doesn't see any immediate catalyst on the horizon.

For a young person, you want something with growth characteristics. You want something growing faster than the average company in the market. Though the 3 suggestions are all good companies, he'd go with the credit card space, but buy Visa instead of MA. Visa is a better version than MA and at an undemanding multiple, with more international exposure; reported very nice numbers last week.

There are a variety of traditional stocks that pay high dividends, but their purpose in life is to pay out that dividend. So they tend not to be growthy stocks. Be aware of, and avoid, companies that have grown into a high yield; in other words, their stock price has fallen and created a higher yield. WBA is an example of a company that deteriorated, not the company it was, suspended the dividend.

Options would include consumer staples, telecom, or a company like PM. They traditionally pay out nice dividends and are stable.

Mag 7 control about 33% of the entire weighting of the index. So a cap-weighted index fund actually adds risk to your investment thesis. He loves some of the Mag 7 companies, but he doesn't have as high a weighting as the S&P 500 does. Drill down into the S&P 493 (so to speak) for good opportunities and good value.

Obviously, shares slid over the week ahead of the Trump tariffs. He's now thinking of slapping tariffs on Europe. This will add volatility to the markets in both directions and will extend well into next year. The US will need to issue debt; listen for details on the debt financing at 8:30 am EST Wednesday. Janet Yellen has been criticized for using treasury bills to finance the debt, because it causes a serious imbalance. So, how and when will they normalize that? This could put upward pressure on interest rates, especially with tariffs. Meanwhile, stock multiples are pretty high in a market priced for perfection. Expect more volatility. Even with earnings growth, the market can still move sideways. But we can't keep expanding multiples.

Not a chance. Such changes happen only every 100 years. Rarely. The US is the best dirty shirt in the laundry, despite all its ills. No other country is big enough to take over the USD, not even China or India, though down the road maybe.

Trump is using tariffs to get deals done, like Mexico getting on the phone with him, and is now putting 10,000 National Guards along its border. Bigger picture is that the USMCA treaty is up for review in 2026. Until then, Trump will be hard and difficult until he gets what he wants out of Canad and Mexico, but we don't know exactly what that is. Also, Trump says that Canada is ripping off the US, which is wrong. The US needs Canada's oil and gas. There is a trade surplus for Canada; without oil, there is no surplus. Since fracking began over a decade, the US has bought proportionally more Canadian crude oil. So, to tax this is the dumbest thing he ever heard of. He's wrong to say that the US is oil-self-sufficient. Rather, the US needs Canada. There will be a lot of volatility in markets for the next year until a new USMCA, and it will be hard to negotiate as Canada is changing Prime Ministers. 

Tech themes that created investing opportunities:

Microprocessors

The development of the microprocessor, and semiconductors, truly advanced global technology. Suddenly, personal computers became commonplace, resulting in higher productivity and significant cost savings to customers. The world, and particularly North America, went from building things to becoming a service economy, with resulting loftier profit margins. Companies such as Intel Corp., which became the biggest semiconductor company in the world in 1992, saw their stocks soar. Intel stock rose 11 years in a row from 1989 to 1999, including a 95 per cent return in 1992 and a 132 per cent return in 1996. International Business Machines Corp. (IBM) was another big winner from this trend, though not to the same degree.

The internet

This development is likely much more widely known, since everyone uses the internet now. We know about the dotcom days and how nearly every company in the world was scrambling to make sure they got a piece of the internet action. Certainly, the ‘net helped companies drive costs down and it opened up the entire world as potential customers. Amazon.com Inc. is the poster child of stocks in this era, with a 966 per cent gain in its stock in 1998. It then crashed hard (80 per cent) in 2000, but is up about 250-fold since then.
Unlock Premium - Try 5i Free

The Trump tariffs are a wake-up call. The next government needs to consider how to protect ourselves from this situation without getting rid of the US, but having other options for our natural resources amid all sectors. Mexico and Europe (will) have the same problem.

Ideally, he'd like to see both the S&P 500 and the TSX hit new highs, so he'll be watching to see what the S&P 500 does here. If he and his team are correct in the broader view that we're late cycle, the TSX should outperform the S&P 500. That's what it's done so far because of the resource weighting. As we get late in the cycle, resources typically get a better bid.

If you can imagine a line going from bottom left to upper right, that represents the secular bull market he believes we're in until 2030. Within that chart, you have these 3-5 year cycles. He thinks a new cycle began in October 2022, and this cycle is getting long in the tooth.

From a lot of the signs he's seeing, at some point this year we're going to see the end of the cycle. It's going to be a great investment opportunity, but right now he's seeing some cautionary warning signs. The market's getting a bit frothy here.

Looking at this indicator, around 1 is flat, which is an even number of buyers and sellers exchanging puts and calls. Over the last couple of weeks, investors have been quite exuberant and buying far more calls than puts. It's really at an extreme. He's quite concerned, as this is what you typically see when things are frothy.

In theory, he's a momentum guy, so it's fine that we're seeing this kind of momentum. But concern comes because the market internals aren't really there.

Conversely, if we saw a lot of puts being bought, he'd be a lot happier about how the market internals look. He's nervous, and you'll see this in his best ideas later on. He just wants to be safe and steady right now.