“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” – Warren Buffett, who is likely the greatest investor of all time and hung up his skates last month at age 94 with a net worth of over $150bn

Note that the contents of this memo are all my thoughts, and not the views of RBC Dominion Securities. As well, no part of this content was AI-assisted or created.

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You can also now listen to this month’s abbreviated podcast version HERE.

Friends & Partners,

I have been doing this long enough (almost 3 decades, oof!) that I have seen many things that pass for “conventional wisdom” stop working at some point. If you get enough grey hair in this business, you have likely seen a few cycles. Interestingly, many people only survive (as an investor) only half of one cycle – the first half, which is less instructive. I would argue that half of today’s cycle enveloped the end of the Financial Crises (so ~2009) to 2022. Things have changed now.

It can be unbelievably stressful and unsettling when markets go haywire, like we’ve seen again this year. But we have certainly experienced periods of panic before. And we’ve usually seen this movie before – though it changes a bit every time. The human emotions do not. While we can’t prevent others from making emotion-driven decisions, we can remain disciplined, grounded and process driven, which is the key. I touched on this at length in our most recent podcast that you can listen to HERE. In it, I discuss that investing isn’t actually about earning the highest returns, which may seem controversial at first. It’s all about the RISK taken to achieve that return. And behaviour matters – I’m a pilot, and investing can be a bit like flying, which is hours and hours of boredom punctuated by moments of sheer terror.

Sadly, today many people’s views are further into one camp or another. There isn’t necessarily a lot of thought that goes into it each viewpoint. We must have the ability to change our mind. That’s especially true when assessing markets and investments, but it’s very difficult for most to do and requires a lot discipline, humility and reflection. There are few other jobs in the world where you have to do that. But things are constantly evolving.

2025 is shaping up to be a quagmire of moving parts.

US tariffs are all over the map, and even though the Court of International Trade ruled that the administration’s use of the International Emergency Economic Powers Act (IEEPA) to impose reciprocal tariffs on most trading partners was an over reach, that will be fought and the threat of tariffs are likely here to stay in some form at some level. The size and speed of implementation is still TBD, but it’s not zero. Additionally, the ruling didn’t say the President can’t implement these tariffs. It just said that using IEEPA to justify them is invalid. Point being, look for the administration to try other avenues to justify the tariffs or to increase non-tariff trade pressure. The intent of tariffs is to address the current account deficit, create US manufacturing jobs, and generate revenue for the US government to address the fiscal deficit.

One reason for caution is that the market seems to be ‘looking past’ the tariff noise for the most part, and acting like concrete deals are imminent. But we have seen only modest progress on potential trade frameworks and very few trade deals, which are complex and often involve thousands of products. There’s a good chance we see more market volatility around this subject I believe. We are likely still in early innings of any impacts being caused by reciprocal tariffs.

Overall, things remain OK in the US economy so far:

1. Strong earnings from key companies have fueled strong Q1 earnings growth,
2. Oil prices have declined significantly since the end of March as OPEC signaled increased production, which helps to dampen concerns about inflation and consumer cash flows,
3. A modest rebound in some economic figures (the ISM Services Index combined with a U.S. steady jobs report).

We’re not returning to the economic system of old. Trump plans on raising significant revenue through tariffs and the only question is the speed of their implementation. What are the cost implications of reshoring entire industries? We don't know, but they won't be de minimis. From all of this, weakness is bound to leak into the economy in the coming months. Valuations (especially in the US) are high/stretched, and Treasury yields don’t appear to be on a downward trajectory, even if the Fed lowers the overnight rate a bit from here. Rising yields won’t help stock valuations unfortunately.

Now that equity markets have recovered most of the April drawdowns, it feels like many across retail have significant public equity exposure and don’t realize how much risk they are taking. 40-50% drawdowns are about a once in a decade event, IT IS A CERTAINTY. Common enough that one should be positioned and prepared. But investors have been conditioned to expect that central banks will be there to bail them out and that ‘buy the dip’ will work into perpetuity. Time will tell.

Implementing some defense, ‘defensive growth’, and some ‘hedges’ are the name of the game today in my view. Defense and hedges are insurance. It’s funny, because people have insurance on their house, their car, their life, but not on their portfolio. Which makes their life more procyclical – making the highs higher and the lows lower across the board since portfolios are tied to markets which are tied to the economy which is tied to your job and wellbeing. We want to smooth the ride so our clients can sleep at night, preserve capital and meet their goals at the end of the day, whatever the days throw at them.

 

 

 

Other Interesting Things To Highlight

Last month, we hosted a number of clients, partners and friends for an event entitled " Maximizing Your Impact - Strategic Philanthropy and Leaving a Legacy" at the beautiful Bear Estate by the bay in Collingwood. We had some heavy hitting experts from RBC in Leanne Kaufman our Royal Trust CEO and Philanthropic Advisor Angus Gordon, along with 4 leading local charities (Georgian Triangle Humane Society, My Friend’s House, Escarpment Corridor Alliance, and Hospice Georgian Triangle Foundation). It was a wonderful evening, thank you to the speakers who helped empower attendees with knowledge and tools to help make a lasting impact through thoughtful, strategic philanthropic giving.

What a blast it was to be the presenting partner and title sponsor for My Friend’s House and their “Ultimate East Coast Kitchen Party” last month. My Friend’s House is a non-profit agency offering support for abused women living in the Georgian Triangle.

 

 

There Are Lots Of Reasons To Remain Cautious & Defensive*

There is significant complacency out there – valuations are high, sentiment is optimistic again, animal spirits still abound. One of the thought leaders in markets is JPMorgan CEO Jamie Dimon, and he’s noting caution on all fronts, see a 2 min clip of him speaking about that HERE.

On the tariff front, markets rallied recently on the idea of tariff reduction. There is a consensus on Wall Street that the U.S. economy can withstand 10%-15% global tariffs and the U.K. trade deal. The logic is this: If there are only 10%-15% tariffs, then the economy can likely stomach that and the chances of a recession or a surge in inflation will decline sharply (and since much of the drop in stocks has been driven by stagflation fears, the reduction of that risk is a positive). The market has been consistently aggressive and optimistic in discounting Trump’s commitment to tariffs which remains a risk moving forward as there is still a ton of wood to chop for him on the Tariff negotiations front, and he is unlikely to back down across the board.

And here’s another interesting insight: If the US doesn’t continue to unwind their chaotic approach to trade policy, we may see an interesting situation where inflation is rising in the U.S. but other developed countries experience deflation. Ex-US could be a dumping ground for excess Chinese goods. That would be a messy outcome from all of this.

On the economic front, numerous surveys of soft data are deteriorating. Analysis from Goldman Sachs points out that it’s not unusual for the hard data to lag soft data. In that case, the market may be in that interim period analogous to the post-Bear Stearns bankruptcy and market recovery, and the February 2020 market recovery when the coronavirus was known, but investors hadn’t fully realized the magnitude of the effect.

Valuations are steep (especially in the US stock market). Which doesn’t bode well for longer-term returns given the expensive starting point.

Over the long term, starting points of excessive pessimism set the stage for healthy returns while starting points of excessive optimism pave the way for disappointment. This observation is captured in the following graph, which clearly demonstrates that higher starting valuations lead to lower returns, and vice versa.

Source: Daily Shot

This relationship brings to mind the guiding principles of legendary investor Howard Marks:

• It’s not what you buy, it’s what you pay that counts.
• Good investing doesn’t come from buying good things, but from buying things well.
• There’s no asset so good that it can’t become overpriced and thus dangerous, and there are few assets that are so bad that they can’t get cheap enough to be a bargain.
• The riskiest thing in the world is the belief that there’s no risk. 

So, after a record 15-year run, the U.S. stock market may be poised for a prolonged period of underwhelming performance. As Meir Statman in WSJ writes, “There is a common belief that while U.S. stocks can inflict painful losses in the short term, they are sure to deliver gains if you hold them for 10 years. And if not in 10 years, definitely in 20 years. Unfortunately, this perception is a misperception.” I have written ad nauseum that the investing landscape will be different moving forward, and we have to position accordingly.

It is hard to imagine the S&P 500 dropping and taking 15 years to recover, yet it has happened before and other global equity markets have experienced much worse. Prepare for the worst, hope for the best…

Source: SocGen

Over a 5 year period, 60% of stocks in the Russell 1000 have a 40% drawdown or more.

Source: Mitzuho

Bottom line, the economy probably can survive 10% global tariffs (or somewhere around there). And while 2025 earnings will be cut, the cuts don’t have to be drastic. But the problem is the S&P 500 is trading well over 21X forward earnings, which is far from a “slowing growth” multiple or a “geopolitical uncertainty” multiple, so that leaves limited room for error. But there are opportunities beneath the surface and across asset classes and geographies.

 

 

But Don’t Cut Off Your Nose Despite Your Face*

Believe it or not, doing well with your money has little to do with your intelligence and most to do with your behaviour. Ordinary folks with no financial education or background can become wealthy if they have certain behaviour skills that have zero to do with formal measures of intelligence.

We have to be careful when assuming that outcomes are completely attributable to effort and brains. Wealth isn’t always built because the individual was the smartest guy or girl in the room. Success in investing isn’t always due to creating the ‘perfect’ portfolio, but rather has more to do with what you don’t do, especially during times of volatility. And we certainly got plenty of volatility in April with all the tariff noise.

Bull markets often drive individual investors into thinking they’re brilliant stock pickers, just like bear markets scares many to sell quality investments. Bill Gates once said “success is a lousy teacher as it seduces smart people into thinking they can’t lose”. It pays to remain humble, especially when it comes to portfolio management.

Behaviour over the long-term is more about what you shouldn’t do – which is usually selling at the bottom, or buying only when things ‘feel’ good (which is usually close to the top).

You can’t and won’t time the market consistently – full stop. The only reason most investors underperform is because they let their emotions drive their investment decisions. Most investors underperform solely because of their behaviour. This is a proven fact – and the chart below shows it (from DALBAR).

It’s all about building institutional portfolios by implementing disciplined investment processes, backed by strategic thinking, to avoid impulsive decisions.

Source: Fidelity, DALBAR

 

 

Always Lots Of Reason To Remain Optimistic*

Man, the market is moody! A month ago (and even much later than that), the outlook for the economy was stagflation and the outlook for stocks was bordering on a “lost decade” similar to what was witnessed in the 1970s and 2001-2009. But, oh how things have changed.

In the past month, the S&P 500 surged over 10%, the VIX dropped significantly and sentiment indicators swung much more bullish from extremely negative readings. The vast majority of analysts are now positive on stocks and many are touting a continued rally and even new highs in the S&P 500. So, what is behind this bullishness?

Markets don’t wait for smooth roads. Markets are forward-looking. They don’t react to the world as it is – they respond to where it might go next. The acceleration is often quick, the early part of the rebound is often the sharpest. Looking at the chart below, we can see that after past bottoms, equities gained 15–25% in the first month alone. That kind of momentum is nearly impossible to time and often missed by those who try to wait out the storm. The turn always happens before it’s obvious. In nearly every cycle, stocks start recovering before the economic data shows improvement. By the time the economy gets the green light, the market is already speeding ahead.

Source: RBC GAM

So here are some bullish arguments today:

1. Bullish Argument Point 1: A 10% global tariff won’t be enough to derail the U.S. economy or cause stagflation. The recent tariff reduction on the U.K. and China is leading investors to believe that the tariff regime for the Trump administration will be 10% global tariffs on imports, larger tariffs on select categories such as steel, non-USMCA Canadian and Mexican imports and pharmaceuticals, among others and exemptions for key imports such as energy, electronics, semiconductors and autos/parts from Canada/Mexico. Bulls believe that, while much higher than what we’re used to, those tariff levels aren’t enough to derail the U.S. economy. CNBC had a segment recently where retail analyst Dana Telsey (one of, if not the best, retail research analysts on the Street) was talking about her proprietary price index to measure tariff impacts. She noted that a Barbie doll for sale at Target saw a 40% price increase over the past week! That sounds like a lot, but the price went from $10 for the Barbie to $14. This is obviously an anecdotal example, but if tariffs rates are 10%, and if we assume the manufacturer eats some of it (1%-3%), the shipper eats some of it (1%-3%) and the retailers/distributor eats some of it (1%-3%), then there’s not too much of a burden on the consumer (1%-6%) and it’s certainly not enough to derail consumer spending. Meanwhile, the 10% global tariff regime will give businesses clarity to continue with corporate planning. Bottom line, it’s just not enough to derail the economy.
2. Bullish Argument Point 2: Inflation will not rise and the Fed will cut rates. It’s undeniable that a 10% global tariff regime will increase prices, but the Fed follows two specific inflation measures: CPI and the Core PCE Price Index. It’s possible that decreases in housing and energy could more than offset any price increases from consumer goods. Remember, housing price increases work slowly out of inflation data. That’s one of the reasons CPI remained so elevated for so long. Well, it works both ways and with housing price increases now low (or even negative) combined with lower oil prices, the inflation statistics could remain low enough to keep the Fed on track to cut rates multiple times this year, further supporting the economy. As well, A wide variety of goods are actual experiencing deflation in the US (lots of foods, TVs, sports vehicles, appliance, airline fares, hotels, etc). Bottom line, inflation is not as big a risk as the Fed thinks, and once that’s obvious, they’ll cut rates and further support stocks.
3. Bullish Argument Point 3: Valuations aren’t as bad as it seems. If we use the traditional way to value the market (forward-looking earnings), the S&P 500 is very expensive given uncertainty because consensus S&P 500 earnings for 2025 are around $265, which means the S&P 500 is trading at 22.2x earnings. That’s honestly absurdly expensive for this environment (especially with the 10-year yield creeping around and above 4.50%). But starting in July, earnings estimates shift to next year (2026), and 2026 S&P 500 earnings are expected to be somewhere around $290/share. Using “next year,” the S&P 500 is trading at just 20.3x, a multiple that can be increased at least a “turn” to 21.3x (which means the S&P 500 could rise by another ~300 points and still not be overvalued, which would put it at a new, all-time high).

None of these arguments are unreasonable. The bullish argument has merit and for those that want to follow it, I don’t think they’re fools. However, I do think some of them are aggressive right now.

It’s notable that there is significant capital still on the sidelines. Over $7 trillion to be exact - there is a record $7.24 trillion in money market funds right now.

Source: Market Ear

Bottom Line: Markets don’t wait for green lights. They start moving when the road ahead simply looks less blocked. Recoveries begin when confidence is still low. Momentum comes early and fast. Waiting for comfort often means missing the turn. History shows the strongest gains often come before conditions feel safe. Tariffs are a headline, not a halt. Policy noise may detour the market, but it rarely derails it. Staying on the road matters.