Highlights
- Our Observations
- Current Economic Outlook
- Our Investment Strategy
Our Observations
Last month, we experienced a rare level of volatility. The S&P 500 index both lost and recovered more than 10% within the same month, which has only occurred 7 times since 1950. This significant volatility was caused by from the U.S. administration’s tariff announcements.
This example underscores the pitfalls of reacting emotionally to market volatility. Market recoveries often happen swiftly and unpredictably, making it nearly impossible to time the market effectively. Investors who sell during downturns miss out on these recoveries, significantly harming their long-term returns. By contrast, those who stay invested through the turbulence benefit from the market's natural tendency to recover and grow over time.
Investing in diversified equity portfolios with some exposure to fixed income can smooth out the ups and downs of the markets in your portfolios (and calm your nerves!). High Quality stocks that delivered growing dividends are designed to reduce volatility through diversification across geography and sectors. As a result, though it is impossible to completely avoid volatility, they most often exhibit less volatile daily returns than common stock indexes such as the S&P 500. This helps our investors weather short-term market swings while staying aligned with their long-term objectives.
Investing for the long-term means surviving the short term. It requires continuous discipline, patience, and a commitment to your financial goals. As always, please remember that these fluctuations are temporary.
History has consistently shown that markets recover and reward those who remain invested.
Current Economic Outlook
De-escalation of trade war has been significant.
A de-escalation in trade tensions has emerged over the past month. The U.S. and China took meaningful steps over the past week with both countries agreeing to meaningfully reduce tariffs on one another's goods for the next three months, carving out time for a more comprehensive trade deal to potentially be negotiated. The U.K. and the U.S. also agreed to a limited bilateral trade deal. Some sectors will remain subject to duties while others will be spared entirely, indicating that the U.S. administration may be approaching things more strategically than it first appeared. Both deals leave the baseline 10% global tariff rate imposed on "Liberation Day" in place, which is broadly in-line with what investors expected earlier this year. On the one hand, the reduction in tariffs to a more manageable level reduces near-term risks to global growth. On the other hand, the effective U.S. tariff rate is still at its highest levels since the 1930s and risks creating some “stagflationary” headwinds, particularly in the U.S., with growth that may slow and prices that may rise. There have been few signs of tariff-induced pricing pressures thus far, but they are expected to emerge over the next few months.
Can U.S. exceptionalism prevail?
The U.S. stock market has recovered all its losses experienced in early April. As a result, the stock market is at approximately the same place it was when the year began. At that point, we were contemplating whether the long-term trend of U.S. stock market outperformance could continue. Its remarkable outperformance over the past decade has been driven by a combination of strong earnings growth and a valuation rerating over the years, which means that investors have been gradually willing to pay more for a dollar of earnings than they did in the past. This valuation “premium” can be justified to some extent by the U.S. stock market’s strong track record of consistently generating attractive earnings growth, elevated profit margins, and high returns on capital. But the willingness of investors to push the valuation premium higher over the past decade has left U.S. stocks rather expensive. While we are confident in the ability of U.S. stocks to continue to generate strong earnings growth in the years ahead, we are less convinced that the valuation multiple can move higher in a similar fashion to what we have witnessed over the past decade. This suggests the returns from U.S. stocks in the years to come may be slightly less impressive.
Our Investment Strategy
Opportunities to invest tend to arise during periods of market disruption, when prices reflect investor concerns, elevated uncertainty, and higher risks. That was the type of period we observed last month, though it proved to be relatively short lived. There inevitably will be other surprises in the future, potentially resulting in longer periods of market weakness that could act as opportunities, either to rebalance across our client portfolios or for more specific and targeted investments. We will be watching closely, ready to act.
"The stock market is a giant distraction
to the business of investing.”
- John Bogel, Investor and founder of Vanguard Group
As always, we are available to answer your questions.
Benoit Legros, B.A.A., CIM, FCSI
Senior Portfolio Manager and Wealth Advisor