Transcript

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This is Capital Insights, a podcast from the Chapman Private Wealth Group. Here's Paul Chapman.

Welcome to the inaugural podcast for our monthly note. We'll hopefully be able to do every month for you moving forward. I'm making this a shortened version of the actual written note. If you want the full version of that, you can always print that off and read it. But I'll cut to the chase as best I can in this version of it.

So I'll start with the quote of the month. I always like to put in a quote and it's, "defense wins championships," which is one we've all heard. I think you can attribute it to any coach, but I think it was attributed to football coach Bear Bryant in the US. And this is important when it comes to not only sports, but many things in life, which includes your portfolio.

And many are wishing that they had more defense in place, given the experience of March and the noise in the markets and the volatility inherent in the markets, mostly from Trump-induced tariff noise, of course. So when there's noise in the markets, most investors wish they had this defense in place. And there's lots of noise to go around in March.

Defense and capital preservation is a core tenet at Chapman Private Wealth Group. Our clients have been well-served of late, given that our positioning and our call a few months ago was for heightened volatility this year, and we were very defensive. And history has taught us that the average equity market drawdown every year is around 13%. And these corrections are normal and healthy.

But this isn't to say that what is causing the volatility in any given year should be dismissed, but rather it's about preparing and not predicting. This isn't about timing the market. It's about time in the market with the right plan in place. So if you need help on that front, of course, reach out. We've got you.

History has always taught us that there will always be a reason not to invest or move your entire portfolio to cash, which usually doesn't work out so well. And I include a chart that just shows an annotated graph of markets going up over time since the '80s. And of course, you had Black Monday and Iraq Invasion and Gulf War and recessions and different crises and collapses and 9/11 and SARS and avian flu and the list goes on.

So the market climbs a wall of worry, generally speaking. But we have to try to navigate, tactically, through that. And when it comes to equity market in your portfolio, that exposure, I should say, volatility is the price of admission as well. So it's something to keep in mind. We have one major overhang in the near term, and it's liberation day, as most of us know, on April 2nd, where Trump announces his sweeping tariff policy.

There are very conflicting views out there on how this will turn out. It's hard to call Trump's moves, of course. I'm not even sure he knows where he's going to be tomorrow. But you can't blame experts for being all over the map, given how Trump is. While there's been some positive speculation on how this could go, we've seen senior Mexican and Canadian contingents who have been relatively mum as of late, which could mean that they've been placated, somewhat, in their recent meetings with US officials.

There are also some pretty smart experts, Goldman Sachs and Wolfe Research, and others, that I've read that are noting that the market is potentially underestimating an adverse surprise on this front and that investors seem to be complacent on this risk. So there's no way to know until we get there, which is going to be, the day after I release this, The Monthly Note. So by the time you read this, we'll have more news.

But the most beneficial thing that the administration could do for markets is just to identify an end goal for the policy, which is likely something along the lines of what's called the Mar-a-Lago accord, which I explain in one of the subsections of the note, which I'll go through the subsections in brief after this.

So we're facing one thing which is making markets volatile and nervous, which is uncertainty. Markets hate uncertainty. The markets can handle negative news, positive news. But it's the uncertainty that often causes a lot of volatility, like we're seeing lately.

Tariff and trade policy is totally unknown. Headlines are volatile. Major government institutions are being gutted or outright closed. And administration officials are openly acknowledging the possibility of a recession. All this has led to a collapse in investor and consumer confidence, and markets are afraid all this uncertainty will cause a dramatic reduction in-- and business spending, and that will cause an economic slowdown or worse, a recession.

So all of this uncertainty causes consumers and businesses to essentially hole up and wait for clarity. You've probably heard many stories directly on this happening. Anecdotally, I certainly have. So combine that with elevated earnings and a lot of bullish optimism of late or moving up until recently. You've got the recipe for correction. And that's what we saw in March and is potentially not over yet.

The economic data, though, is held up pretty well. And we're not seeing the type of collapse in activity that people feared even at the start of March. But until this policy around trade and tariffs are known and consistent, and we get a break from all the dramatic headlines from the US government men especially, we should expect continued volatile markets. So a trade war will initially be inflationary, despite what Trump might argue and others.

But that could be a stagflationary setup, which is-- that's not positive for markets generally. But we'll see where things go from here. So this doesn't mean things can't get better, though. So I'd like to argue in these notes, both sides of the coin. I'll always give my view and things as I see it, but there are always positives and negatives to wrestle with. And you have to remember to breathe sometimes through this type of noise. And this is one of those instances.

So despite the parade of analysts in the financial media warning of a further decline, many of these who were enthusiastically bullish just a few months ago, the reality is it's much too early to say that markets can't remain resilient from here for a few reasons. Firstly, we don't know what the actual tariffs are and how long they'll last.

So as you know, Trump has flip flopped multiple times and changed his stance, looking for political wins. And these could last a few days, a few weeks, a few months. But it's unlikely to be permanent, I would suggest, even though he says otherwise. It remains that this whole tariff drama actually lowers global tariffs on the US, potentially.

And secondly, the economy is remaining resilient, employment is strong, and even though political chaos will likely slow growth in the meantime, it doesn't mean there's definitely a recession coming. As long as employment remains strong, the chance of recession actually stays relatively low. Thirdly, taking a longer view, there are actually economic positives looming in the future, with tax cut extensions in the US and deregulation, both in the US and Canada, which should boost growth later this year.

And finally, the Federal Reserve in the US confirmed it's watching the economy. It stands by ready to support growth if recession risks rise, which is a good thing. This is the quote unquote "Fed put" that people talk about. It limits a worst-case scenario. So remember that senior levels of the Trump administration are staffed with very successful people who've spent their lives in the economy and markets. I argued this last month as well. It's very unlikely that they all have decided together to go all in kamikaze mission to wreck the US economy.

The point being, we may not be at a level that triggers that "Trump put" yet that people talk about where Trump actually becomes aware of the markets and affected by markets being super weak and then changes tact. But at the same time, we don't have a bunch of know-nothings making decisions there, regardless of people's opinions of them. It's hard to argue that Howard Lutnick and Scott Bessent don't understand markets or the economy, that's for sure.

So as tariff and trade headlines still dominate the markets, we can expect continued volatility. I think we need to play defense, win the long game. As I've noted for some time and has proven the case recently, there are opportunities in the market that still abound, but they won't be generated from the same places as they were in the last decade.

For instance, passive investing worked quite well in the last 10 or 15 years. The leaders in the recent market, like the Magnificent Seven, the large US growth stocks, they've obviously been lagging this year. So things are shifting underneath the surface. The recent bull market run has been extraordinary until lately.

And Bridgewater pointed out rightfully so that out of any 15 year period to be invested in equities dating back to 1970, the one that we've lived through was the best. Stocks have been on a relentless tear, with any dips fading into memory. Returns have been more than double the average. So all that's to say is we're in a new environment and paradigm, I believe, moving forward and we have to position as such.

So finally, on a related note, in this opening section, I just encourage readers to read the subsection on how the Trump-induced noise can help Canada look inward and harness this opportunity to change for the better moving forward, which I can expand on in the first subsection. So, like I said, I'm not going to drone on the whole note. But with the subsections, one of them is what the opportunity is for Canada. How does it become better from this mess?

And I think at the least, the noise and the threats from Trump should help Canada do this soul searching and get its you know what together. If you look at Canada's history here of late, in the last 10 years, GDP per capita has only risen by half a percent. The United States over 20%. Many other first world nations are between 5% and 20%. We're in last place.

Recent population boom has not come with productivity gains at all. Actually, we've lowered on that front, even though the population has skyrocketed. Provincial trade barriers are obviously low-hanging fruit that you hear talked about. Canadian provinces trade more with the US than with each other. There was a recent study from Macdonald-Laurier Institute a couple of years ago that showed that eliminating internal trade barriers could boost Canada's economy by up to 8%, long term, and add would add up to $200 billion every year.

So that's a good place to start, I think. The powers that be are working on that. We know that Canada could also use some deregulation. Excessive government regulation has been pretty brutal. Stats can show that regulatory requirements have surged by almost 40% between 2006 and 2021, which cost the economy 1.7% on the GDP front every year. And the business investment has plummeted 9% due to that red tape.

Home building is another problem, as we all know. We've heard many stories about the excessive red tape and increased regulation on that front that needs to be cleaned up. Energy infrastructure build has been, well, as I say in the note, nothing short of a joke. Canada should have had shovels in the ground years ago to begin building the infrastructure to reduce reliance on pipelines through the US. I think that will get fixed.

We're a very resource-rich nation overall, and there's a sustainable and ethical way to harvest more of this for our benefit, I think. R&D and mineral exploration investment has more than halved since the 2000 peak, partly due to a commodities bear market in between, but also government demonization of that sector.

Another section, so I always highlight in the note, the positives and the negatives. So I would say, on the positive side, even good years have dark days. So I titled that section-- The outlook is maybe not as bad as you think, which is often the case. Financial plans are always designed with periods of volatility in mind. But I think we can construct portfolios to minimize the downside capture when these dark periods hit inevitably, which is what we focus on in our business practice.

But we have to remember that not all corrections pretend a massive swoon that's imminent in markets. In fact, 13 of the previous almost 40 corrections turned into bear markets. So certainly not even half of them. All bears start with a correction, I should say. But not all corrections turn into a bear market. So it's just saying that we're not necessarily going to fall off a cliff. There's a lot of unknowns, but that's something to keep in mind.

As I noted in the opening section, the actual economic data is not yet showing the type of weakness that implies growth is slowing, so far. So the economy is not buckling yet under the weight of the policy uncertainty. I think it's maybe a matter of time if it stays this uncertain, because there's a lot of halting on CapEx and hiring and spending decisions.

Now, the bears might point out that most of this data that we have on the economy is from February, when before the chaos erupted. But data does matter. It's what we've got so far. So far, things, even of late, are still trending positively. And the reality is that this overall economic data is implying that the economy is holding in relatively well.

On the market side, investor sentiment has tanked to multi-year lows, which is generally actually a bullish signal for markets. When people think that things are as bad as they're going to get, that's usually when markets turn. So that's a positive. And finally, I would note, on this front, that the Canadian stock market actually may not be as sensitive as you think to tariffs.

Bloomberg highlighted a few days ago that aside from precious metals and oil, most of Canada's largest exports aren't in fact produced by Canadian domiciled firms, which limits tariffs direct impact on the TSX. And one data point is many of the largest industries in the TSX, like banks and asset managers, life insurance, health insurance, internet services, food retailers, software, they don't actually export physical goods to the US. So I include a chart that shows some numbers on this front, but their numbers are probably lower than you think.

There's a section on, of course, lots of reasons for caution and defense. I always highlight the negatives, which is, there'll always be a number of those. The market climbs a wall of worry. But those are-- a lot of them are not new. Stocks are expensive relative to bonds, which is measured through something called the equity risk premium. It's at lowest numbers. It's been in some time.

So one thing, I think, you can take away from that is not necessarily that stocks are necessarily going to fall off a cliff. But I think it does show us that returns in the next 5 to 10 years from stocks will be lower than they were in the preceding period. Even in the fixed-income world, spreads are tight. They're arguably expensive on some fronts. You have inflation rearing its head again. Tariffs aren't helping there.

On the economic side, I know things are generally holding up well. But it's a tale of haves and have nots. Top 10% of earners represent 50% of spending. This group's spending, which represents a third of GDP, is supported by the wealth effect, frankly. Wealthier people have more money and home ownership and the stock market.

And so if these asset prices fall, will it shake the confidence of these people and slow the economy down? Potentially. Obviously, the president's chaotic behavior, to put it lightly, is crippling business decisions across the board. So plans for expansion actually are at their lowest level since the pandemic. So there's a lot of unknowns on that front that we have to churn through here.

Then finally, I mentioned the Mar-a-Lago accord. I have a section explaining what's Trump's end goal. And I'll keep it short. And I write a little bit more on it in the note. But in short, it's a major shift he's looking for in the global monetary system, which comes from this "Mar-a-Lago accord," quote, unquote.

It's essentially the idea that the US provides the world with security, and in return, the rest of the world helps push the US dollar lower in order to help grow the US manufacturing sector. So in the eyes of the US administration, this likely brings short-term pain, as they've been noting, in exchange for a perceived long-term gain. Tariffs, therefore, I don't think are likely the end goal but leverage in this broader longer-term negotiation.

In short, the Mar-a-Lago accord is the idea that the US will give the G7, the Middle East, Latin America security and access to US markets. And in return, these countries agree to intervene to depreciate the US dollar. He wants to lower US dollar, grow the size of the US manufacturing sector, and solve the US fiscal debt problems by swapping existing US government debt with new US Treasury century bonds.

So in short, what this is is the idea that the US provides the world with security. And in return, the rest of the world helps push down the US dollar and helps grow the US manufacturing sector because of that. And tariffs are just the first tool in that. So I go on a little bit more detail in that, but I think essentially, that's where things appear to be being pushed towards. So on that note, I'll leave it there. And we will be coming to you again next month, and with some podcasts in between. Thank you.