What a week it was. This week’s newsletter will cover what happened and the implications moving forward, along with reinforcing some time-tested investing strategies that have helped investors get through practically every bear market in history.
Despite going through a reasonably large bear market in 2022, I do not remember ever having to send an email like this. The last time I had to do something like this was during the COVID-19 market crash in early 2020.
And it seems absurd to say because we were left with an unknown widespread virus that was shutting the world down at that time, but I’d almost argue there is just as much economic uncertainty now as there was back then.
A little over a month ago, we were sitting on mid single digit gains in most equity markets. Fast forward to today, and the NASDAQ is nearly in bear market territory. The volatility we’ve witnessed in the equity markets over the last half decade has been nothing short of astonishing.
Over the last 4-5 months, I’ve mentioned quite a few times that we can be expected to go back to historical levels of returns on the markets, that being 8-10% annually. I had mentioned the difficulty was in predicting how we were going to get there. Whether it would be a flat market for a few years or a sharp correction in equities that bring us back down to earth.
It seems like we’re undergoing the latter. However, it has been made more aggressive by swift regulatory changes in what has been thought of as the safest and most regulated country on the planet to invest in for many years.
It is impossible to predict which direction the markets are going to go over the next few years, primarily because the man in arguably the most powerful position in the world seems to change his mind every couple of days.
But, what I can guarantee moving forward is that markets are going to be wildly volatile. Right when we imagined the equity markets returning to some sort of normalcy after a global pandemic and rapid inflation, we’re hit with the early stages of a global trade war, one we can only hope comes to a quick resolution.
As you probably know, I have deferred expressing my thoughts about tariffs over the last few months because we simply had no idea what was going to actually be implemented. However, in this newsletter, I’ll finally dive into it and give my thoughts. But first, my portfolio.
My portfolio moves
I finally have all of my money moved over to Questrade. However, at this point, I am not in any particular rush to deploy the entirety of my cash position.
I will be making small, routine adds to positions with weekly contributions, and once the volatility subsides and we get some sort of clarification as to how this trade war is going to unfold, I will then start to invest larger portions of the capital.
Many would view this as a sort of market timing, which is valid to an extent. However, it is a personal choice of mine to try and avoid making any investments when the markets are shifting 5%+ in either direction. Once this volatility settles and we stop seeing these gigantic daily swings, I’ve got some money to spend and will certainly be doing so.
The one small move I did make to my portfolio this week was to add to my position in Bull List stock Cargojet. There are multiple tailwinds/headwinds for the company. The primary headwind is that a recession in Canada would no doubt lower freight volumes.
However, I believe the tailwinds are a bit more opportunistic, which is why I’m particularly bullish. Around 25% of Chinese goods bound for Canada are currently routed through the United States. I do not know the exact situation and the intricacies around these products, but I would be fairly confident that they will be subject to tariffs, especially if things continue to escalate between the US and China.
This creates a simple solution to avoid those tariffs: for goods to be directly shipped to Canada rather than being routed through the US. Ultimately, this should boost domestic freight demand for companies like Cargojet.
It is a small position inside of my portfolio, but I plan to add to it throughout the year at regular intervals.
The puzzling global trade war
To spare you the long, drawn-out analysis of the tariffs individually, I will say that Trump’s tariff layout came in much worse than initially anticipated.
The tariffs were claimed to be put in place to balance the trade deficits many countries have with the United States. In the simplest terms possible, the US feels it is fueling the economies of other nations by buying a bunch of goods from them, and those countries aren’t returning the favor.
However, there are a few issues here with this line of thinking. For one, the United States has moved on from being a manufacturing economy into the new age, that being technological advancements. It holds trade deficits with countries that produce things like clothing, footwear, and kitchen appliances because it isn’t feasible to manufacture these products in the United States.
Labor laws are stricter, wages are exponentially higher, and unfortunately put much higher prices on necessities like clothing. A prime example? A pair of Levi jeans retail for $128 if made in Bangladesh and around $350 if made in the USA.
Ultimately, running trade deficits with these countries makes costs cheaper for US consumers.
The other issue is rooted directly in the tariffs the Trump Administration put out this week. Despite mentioning they want balanced trade, he even tariffed countries that have a trade surplus with the United States. Meaning these countries spend more on US imports into their country than the US spends importing goods from their country.
If this was all about levelling the playing field in terms of trade, it makes little sense to tariff these countries.
So again, we’re left with a lot of questions as to why.
What is really driving the tariff implementations
I believe the entire situation with tariffs goes well beyond the balance of trade, border monitoring, or anything else that is being pushed.
I believe this is a stance being taken by the United States to leverage its power and attempt to negotiate better trading situations with other countries. We already witnessed this with Vietnam asking the US to postpone tariffs and the fact they’re willing to negotiate some sort of deal.
But on the flip side, we have a country like China that not only refused to negotiate but instead slapped reciprocal tariffs on the United States, something that is likely to impact the trading relationship between these two countries as long as they remain in place. If Trump does what he has promised, and that is to increase the tariffs of any country that places reciprocal tariffs on the US, the relationship between these two countries could get even uglier.
This will make goods from China coming to the US even more expensive. When we look to many of the major tech companies, they manufacture a lot of goods in China. I can think of Apple as a simple example. Apple has already struggled enough to sell its Vision Pro. Imagine it now being 30%,40%, or 50% more expensive?
There are a lot of economists who believe that this is being done to intentionally spark a recession in the United States to get policy rates and long-term bond yields down, and in turn, will make some of the $14 trillion dollars in debt they have due for refinancing in the next 3 years just a little bit cheaper.
However, as mentioned, it is impossible to know the true motives, which leads to a large amount of uncertainty. And the markets hate uncertainty, especially when it comes to the economy.
What this means for investors
As I mentioned, I don’t want to speak much on the tariffs in general because the main focus among many members is simply going to be, “what does this mean for my portfolio?”
This is a difficult situation to process. The last time the United States attempted tariff efforts like this was in the 1930’s, in order to combat the economic downturn at that point in time and spur domestic growth. Unfortunately, the tariffs didn’t work. In fact, they contributed heavily to accelerating the impacts of the Great Depression.
The economy is much different now than it was 100~ years ago. However, there is no doubt going to be added volatility across the globe when it comes to the markets. After all, we’re talking about the biggest safe haven in the world when it comes to investments, the United States, making significant policy shifts that have a chance to materially impact its reputation and economy.
In addition to this, Trump tends to change his mind on a daily basis. It would be safe to say that if these tariffs persist for any length of time, it is more likely than not we see a global recession.
If this is the case, earnings will likely decline, and stock prices with it. However, there is also a chance the United States is able to flex its muscle and negotiate enough reasonable deals with countries to put an end to this madness.
Both of these situations are extremely hard to predict, so the execution as investors is largely the same
As long-term investors, we can acknowledge the fact that equities are likely to be exceptionally volatile over the short term but still have the confidence to accumulate them to achieve long-term, wealth-generating returns.
As I’ve mentioned before, the cheaper stocks become now, the higher our future returns can be expected to be.
However, we have to accept the fact that those returns may not be realized over the short term, and we can’t let short-term price movements impact our long-term strategy.
Unfortunately, this is where a lot of investors fall apart.
They have no problem buying into companies at set intervals during bull markets. However, when a bear market hits, they tend to modify their strategies, make sub-optimal moves, and ultimately miss taking advantage of the times when stocks are more attractive, that being in bear markets.
Once we shift our thinking from:
“I hope the stock I buy today isn’t lower next month.”
to
“I’m fairly confident this company will be able to provide consistent earnings growth over the next decade.”
Then, we will ultimately make better decisions with our money when it matters most.
As someone who has dealt with thousands of investors over the years, I can tell you that most have the exact opposite mentality.
They enjoy the dopamine hit that immediate results have. That being buying stocks during a bull market, despite paying higher valuations at that time, ultimately leading to lower future expected returns.
They then hate the lack of immediate results bear markets provide. They avoid buying stocks despite valuations being lower, which leads to higher future expected returns.
It is a complex mental hurdle to get over, as most of us simply don’t want to take action today for something we might not realize the benefits of for many years. But ultimately, the ones who can do this generally have the best results.
Prepare for some rocky time periods, but don’t let that stop you from investing
As I mentioned, the markets are already impossible to predict without any sort of political or global headwinds. Now, we have the introduction of tariffs from an administration that seems to change its mind depending on which direction the wind blows.
A removal of tariffs tomorrow would likely result in a substantial rebound in the markets. On the flip side, if kept in place, they will likely result in more downside. What is the more likely result? Flip a coin, in my opinion.
The focus for the retail investor should be to simply ignore all this noise and accumulate high-quality companies with the main strategy being long-term wealth generation, and let situations like this play out over the months or years that they take to resolve.
