Well, if the first quarter was a wild ride, the second quarter was likely to have given investors whiplash, and possibly a bit of nausea. Trumps liberation day quickly reversed course as markets plummeted following his made for TV revelation of punitive tariffs on dozens of countries. A 90-day reprieve was provided, pushing “liberation day” into the summer. Watching Trump negotiate anything, from geopolitics to global trade is dizzying, and that is in part the intention. Predict at your own peril.
Importantly to Canadians and Canadian investors, Trump postponed the worst of the tariffs on Canadian goods as we elected a new government and negotiations began. Canadian stocks have shown a degree of resilience on hopes of domestic investment focused on industrial projects. Banks have had a particularly strong performance due to robust balance sheets and attractive valuations. More defensive stocks have performed well also.
South of the border, the market reaction must be driving Trump mad. The S&P500 has been the worst performing developed market this year and there are a few reasons for this. Most importantly, valuations. The S&P valuation is 20-30% above its historical averages, due to lofty tech valuations. Also, tariffs are likely to end up being a tax on US consumers and businesses, driving prices higher and potentially putting upward pressure on interest rates.
Europe is benefiting from similar enthusiasm that Canada has seen. Hopes of an economic renaissance from increased fiscal spending have spurred shares higher. While several of our portfolio companies continue to benefit from this, we are taking some profits as valuations which were previously cheap, now appear closer to fully valued.
Looking ahead there remains a significant amount of uncertainty for countries, companies, consumers and investors. A protracted war in Ukraine and increasing conflicts in the Middle East on top of tariff threats is enough to make you want to sell everything and run for the hills. We would advise against that. An important lesson in all of this (especially when President Trump is a key variable) is that predicting the future, let alone the market reaction, is next to impossible and fruitless.
No doubt there are big risks out there and the market could sell off yet again. We are long overdue for some sort of recession or contraction. Persistent tariffs could finally be the catalyst. What investors should have learned from previous scares this year, and in 2022, is that regardless of what the catalyst is, or where it comes from, the biggest risk in stocks is from companies with the highest valuations. These companies are dependent on clear skies and rosy assumptions. When the clouds emerge, rosy assumptions disappear and valuations tumble.
Rest assured, we continue to monitor the portfolio for potential risks and take profits where prudent. We are building higher cash levels from dividends and deploying deposits gradually to take advantage of opportunities. It is impossible to say when a drop in prices might happen, but by maintaining a disciplined approach, focusing on quality and taking a long-term view, we will be able to navigate the current market landscape.
We wish you the very best over the summer with your friends and family. We hope you have time to rest and disconnect and know that we are keeping a close eye on everything on your behalf.