To my clients:
First, an announcement. I’ll be away for Spring Break vacation with my family until March 26th. There will be no update next week. Since I’ll be quite busy catching up when I return on the 26th, Its unlikely I’ll write an update on March 28th either. Be assured, given recent market dynamics, I’ll have my work computer with me while away. I don’t plan on working much but, if necessary, I’ll be able.
It was a down week for North American stock markets with the Canadian TSX finishing down 0.8%; the U.S. Dow Jones Index down 3.1%; and the U.S. S&P 500 down 2.3%.
Well, after a nice two year run of consistently positive investment returns in 2023 and 2024, markets (as measured by the S&P 500) this week officially entered “correction” territory (defined as a market fall of 10.0% or more from the peak). Markets crossed this threshold yesterday with the S&P 500 down 10.2% from its 6,147 peak set on February 19th. Two things to note: 1) markets rebounded sharply today and are now down “only” about 8.2% from the same peak; 2) from January 1 through February 19 markets were up solidly such that the year-to-date broad market loss through close of business today is a lesser -4.1%.
Reflecting further on the current market correction, it’s important to reiterate (as I often have over the years) that corrections are a normal market phenomenon. On average, markets suffer such a setback every 1.5 years or so. In other words, if tariff headlines were stripped from the narrative, after two years of steady growth in 2023 and 2024, it would not necessarily be unexpected to see markets suffer a setback of similar magnitude to the current experience. It happens. And in spite of it happening with regularity, it does little to change the long-term upward trajectory of markets. I reiterate what I never fail to tell clients in meetings – high quality equities (i.e. stocks), owing to their leverage to inevitable economic growth, will, over the long-term, deliver the best returns of available investment classes. Obviously, the caveat to this truism is that in the short to medium term, equities will often exhibit far more volatility than other asset classes.
At this point two additional, somewhat interconnected, points must be made: 1) tariffs cannot be “stripped” from the narrative; and 2) although corrections are a routine market phenomenon, the real bogey that must be avoided is recession. Recessions lead to more significant and prolonged market declines and although these too are inevitably overcome, the anxiety they cause and the time it takes to recover is something that as a Portfolio Manager I’d prefer to avoid on behalf of my clients.
So, to the above two points, it is true that the chaotic and disjointed trade and tariff policy emanating from the U.S. is unsettling consumer and business confidence and, as such, the prospects of recession have increased. But recession probabilities rising does not mean it has become the base case. The average estimate of economists at major U.S. financial institutions pegs the odds of a U.S. recession sometime in the next 12 months at approximately 1 in 3 (in other words, a 2 in 3 chance that there will not be a recession). Myself, I believe the current environment is reflecting a growth slowdown (inspired by tariff policy no doubt) and time will tell if this growth slowdown morphs into something more. There is a growing belief among many in the investment industry (via a theory known as the “Mar-a-Lago Accord” and the accompanying research it is based upon) that tariff headlines may begin receding over the next handful of months as tariffs (both implemented and threatened) inspire a resetting of global trade relationships. We shall see if this plays out and, if it does, what other chaos emanates from the U.S. administration in its place, but of course I’ll be watching closely. Interestingly, a client was kind enough to forward to me one of the research pieces upon which the “Mar-a-Lago Accord” theory is based. It’s a 41-page detailed document, so I have set it aside for airplane reading as I travel to Paris!
That’s it for this week. Next update probably in 3 weeks. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
3200-1055 West Georgia │ Vancouver, BC │ V6E 3P3
Toll Free: 1.844.665.9900 │Email: nick.scholte@rbc.com
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