WE MADE THE MOST OF MAY
May was the best month for the markets since November 2023, helped by a perceived de-escalation in the trade war. We had positioned ourselves well to take advantage of the market upswing – for example, by buying Nvidia on Donald Trump’s “Liberation Day” (April 2nd, the day he announced his initial wave of tariffs). Nvidia then surged 24% in May.
In fact, all of our portfolios are in positive territory for the year – and we are beating the index by more than we were at this point last year.
Something that makes this especially notable: this year, the US dollar is down nearly 5% relative to the Canadian dollar. The S&P 500, which we consider the authoritative indicator of how the markets are doing, is up about 1% in US dollar terms. This means that for Canadian investors, when we factor in the exchange rate, the S&P 500 is actually down approximately 4% in Canadian dollar terms.
And yet we, as noted, are in positive territory.
Overall in April, we executed more trades and did the biggest rebalance of our portfolios in any month since the start of Covid. Amid exceptional volatility in the market, we bought high-quality companies that we viewed as trading below their intrinsic value, and we upgraded our current holdings – all in alignment with our stringent investment criteria.
Not being intimidated by volatility – but rather taking advantage of it – is all part of the process, and a way in which we generate higher returns over time.
BIG BANK BOOST
The Canadian banks have been especially strong contributors to our performance this year. While trade tensions have prompted them to increase preparation for potential loan defaults, their strong capital positions have provided resilience. The banks report modest exposure to high-risk, tariff-sensitive sectors, which is more good news. While the banks remain cautiously optimistic, prolonged uncertainty could heighten risks.
We also note that because the banks are so highly integrated with our domestic economy and housing in particular, their stocks can be seen as a proxy for the Canadian market overall – and therefore we can say there is a thread of cautious optimism among investors that we are not moving toward a worst-case scenario as far as the negative impact of tariffs is concerned.
ANOTHER BOC BLUNDER
The Bank of Canada has made, in our view, another error.
Their prior mistake was increasing interest rates in July 2023, when we believe they should not have; they finally corrected their error by cutting rates in June and July 2024.
Fast forward to this May, when they declined to make a cut (they held the overnight rate at 2.75%, and thus the prime rate stays at 4.95%). But they should have, because – despite the overall cautious optimism just mentioned above – some economic indicators point to weakness: GDP per capita has been falling for six straight quarters, consumer spending is soft, and unemployment is rising.
Interest rates are still relatively restrictive, so the effect of delaying a cut is to risk unnecessary harm to our economy.
HOW IS CANADA DOING?
Partly due to the heightened focus paid in our election campaign to Canada’s financial position, I am being asked more than ever about the sustainability of our government’s finances. This concern is held broadly by investors and so is showing up in higher long-term bond yields by several mechanisms including these two:
-The government needs to issue more bonds to finance their growing debt, sending bond prices down and yields up (prices and yields move inversely)
-The Trump administration is trying to pass their “One Big Beautiful Bill,” which includes higher spending and lower taxes (i.e. lower revenue), which will require another increase in the government’s debt limit. This motivates investors, concerned about the sustainability of government debt, to demand higher returns (yields) for government bonds, in return for what they perceive to be higher risk.
“ONE BIG BEAUTIFUL BILL”
More on this legislation now working its way through the United States Congress.
Our portfolios hold positions in many high-quality US-based companies. As a result, we are always focused on staying up-to-date on tax issues that may impact such investments and whether it may affect your overall return.
On May 22nd, the US House of Representatives passed the "One Big Beautiful Bill Act," which includes new tax provisions. The bill is now under Senate consideration and may be modified before becoming law.
Section 899 of the Bill proposes retaliatory tax measures against foreign countries imposing what the US deems "unfair foreign taxes." Canada’s Digital Services Tax (DST) has caught the attention of the United States and may result in Canada being labeled a "discriminatory foreign country.”
This may change how the US taxes Canadian resident individuals who are not US persons, and Canadian corporations that are not US-owned foreign corporations.
The proposed Bill creates a number of questions about whether it would affect certain investments in registered retirement plans, whether the tax would qualify for a foreign tax credit in Canada and what the exact tax increase would be. In some cases, the withholding tax rate could increase to 50 per cent.
We believe that the Bill is likely to become law. However, there is a chance that Section 899 could be avoided by Canadians – if Prime Minister Carney makes concessions, mostly obviously being the elimination of the Digital Services Tax.
We are carefully monitoring the bill’s progress. If you have any questions or concerns at all about how your investments may be affected, please reach out.
TARIFFS ARE A TAX
The Congressional Budget Office is a body created by the US Congress to provide objective, non-partisan information to that body, to help it make effective budgetary and economic decisions.
The CBO has shared its view on the impact that Trump’s proposed tariffs will have on American households. In summary, it projects that Trump’s sweeping tariff plan “would cut deficits by US$2.8-trillion over a 10-year period while shrinking the economy, raising the inflation rate and reducing the purchasing power of households overall.”
I am not surprised. Tariffs are a tax. Foreign countries don’t pay the tariffs slapped on their goods – US consumers do. President Trump, therefore, has enacted a major tax hike on the American people.
IS THIS SUSTAINABLE?
There is a valid question as to whether such a tax hike is sustainable. The strong performance of the markets can be interpreted as a belief among investors that it is not. If investors were as pessimistic as the Congressional Budget Office, for example, the markets would likely not be doing so well. Indeed, the US president has shown a willingness to not actually go ahead with various tariffs he proposes. The positive performance of the markets in May suggests it has factored in a belief that Trump will not proceed exactly as he suggests.
ALMOST SUMMER
Summer is almost here. It is a slower season, in which many people have the time to reflect on their lives. Financial planning, estate planning and thinking about our families’ future generations are often key pillars of those considerations.
As I mentioned at the start of this blog, our clients’ portfolios are all in positive territory and are continuing to outperform the market. I would add that therefore, all of our clients’ customized financial plans are fully on track.
Even so, I am always happy to receive any questions or concerns you may have, including about your family, friends and colleagues who may not have the benefit of the comprehensive wealth management services we offer and who might appreciate a completely confidential, no-obligation consultation with us on how they might do better.
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com
WHO WE ARE
Tyler Marche, MBA, CFP, FCSI – Senior Portfolio Manager and Wealth Advisor
Tanvir Howlader, B.Comm, MBA, CIM®, FCSI – Associate Wealth Advisor
Tracy McClure, CPA, CA, CFP – Financial Planner
Karen Snowdon-Steacy, TEP – Senior Trust Advisor
Steve Mogdan, CPA, CA – Financial Planning Specialist
Andrew Sipes, CLU, CFP – Insurance and Estate Planning Specialist
Alleen Sakarian, LL.B., TEP – Will and Estate Specialist
**To learn about our unrivalled team of experts, delivering Canada’s widest array of wealth management services to our clients, visit our website, here and here.
WHAT WE DO
