“The only function of economic forecasting is to make astrology look respectable.” – Famed Economist John Kenneth Galbraith
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.
You can also now listen to this month’s abbreviated podcast version HERE.
Friends & Partners,
Did you think we’d be back to all time highs within a few months if I had asked you for your thoughts in the midst of the Trump-induced tariff nightmare in early April? Many fall victim to the allure of ‘market timing’, often at times when it is most foolish to do so. It is human nature –thinking that things which are not foreseeable are foreseeable, and when it all goes astray, one gets stuck in the doom loop of regret. The desire to believe one can see that which they cannot see or solve for is innate. Nothing is more humbling, or breaks down this tragic flaw than the markets!
This experience once again highlights the benefit of thoughtfully investing in a well positioned portfolio construct, and while we are tactical, we are not trying to time things. Investing legend Howard Marks once said “There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing as I hope I’ve convinced you by now, requires second-level thinking – a way of thinking that’s different from that of others, more complex and more insightful.”
Some take little to no risk, which usually means losing money to inflation over time. Which is fine, if that makes you sleep at night. And then there are the people who take too much risk, which usually ends in incomprehensible demoralization. The answer is to take the ‘right’ amount of risk, whatever that may be. The holy grail is in making a solid return for an appropriate amount of risk, which includes minimizing the ‘noise’ and downside. The point is to target risk rather than returns, which I have discussed at length recently. Many do it backward, and aim to get a return and take more risk than they should to get there.
Every concern and worry for investors when it comes to markets is always changing – no, this time is usually not different. All that's different is what the particular uncertainty is. There will always be a worry or two, and uncertainty. The most recent issue to contend with was Iran – for most investment styles, this is just noise, and won’t affect the portfolio in the long run. But it is human nature, ingrained in us since the dawn of time, to look at every event and decide whether it is food or fear. We are emotional animals in the end.
It’s also difficult to fight this instinct because the noise is just so much fun. Which is a problem – we are addicted to negative headlines, and there is a growing “gambling mentality” in the markets (which I suspect will come home to roost for some investors in due course). To escape the noise embedded in the economic and investment signal, you need calm voices who can pull you out of the emotional trap and refocus you on the big picture and what’s really important. This is the role that I aim to fill, and I have many that I consult with and turn to maintain that calm as well.
This year so far is a wonderful example – our clients are in ‘all-weather’ portfolios, diversified across a number of best-in-class strategies and geographies, and have felt very little ‘noise’ in their portfolios while capturing solid gains along the way. Strategies that spread risk across assets are outperforming by near-historic margins this year, a shift from the concentrated bets and indexing in recent years. And I expect this isn’t over.
No question that uncertainty abounds – even US Central Banker Head is uncertain, admitting that projecting interest rate policy is only a guess. He notes that “we haven’t been through a situation like this, and I think we have to be humble about our ability to forecast it.” Looking under the hood in the US, the weakest and most cyclical part of the economy is housing, which has been extremely weak. Employment is also showing signs of stalling as initial jobless claims) rose sharply recently, though levels are still holding within a historical range. And real-time indicators of employment are also weakening. On the other hand, the American consumer is showing resilience (credit card surveys show the resiliency of consumer spending, and same-store sales of U.S. general merchandise continues to grow steadily). The risk here is that some of the consumer spending could be attributed to households front-running tariff increases. Consumer sentiment readings have been crappy too, but are improving as of late. The hard data in the coming months will tell the true story.
Tariffs are here to stay, will be a drag on the economy at best, and could incite inflation if and when businesses pass thru this cost. Uncertainty around U.S. tariffs remains, but the worst-case scenario has largely been ruled out as progress toward more trade deals is being made. Economic growth in Canada and the US should slow, but not stop, and any rise in inflation should prove temporary. Stocks can perform OK against this backdrop if policy, earnings and investor sentiment cooperate.
We're now living in a period of compressed growth expectations brought about by a new paradigm of government spending and government indebtedness. This will lead to lower GDP figures than the past, structurally worse than it has been for decades. It is also no secret that by almost every single valuation metric, broad indices are expensive. Investors need temper forward return expectations and focus on selectivity – there will continue to be value out there, but in difference places than it has been. This won’t be a good environment for passive investors – the fact of the matter is that sideways markets have always followed secular bull markets, and if 2009 to 2021 wasn’t a secular bull market, then I don't know what one is.
Having implemented some defense, ‘defensive growth’, and some ‘hedges’ has served our clients very well this year, and remains the name of the game in my view. We want to achieve decent returns with lower risk, and smooth the ride so our clients can sleep at night, preserve capital and meet their goals at the end of the day. A smoother ride in life is worth the effort – we are emotional animals, and we feel losses more than gains – so let’s minimize those on the ride.
Other Interesting Things To Highlight
I am proud to be the presenting sponsor for My Friend’s House and their events – they are hosing a wonderful evening of art & entertainment in support Saturday, September 20th at Side Launch Brewery in Collingwood. Get your tickets HERE.
The inaugural HeART of Red Gala presented by Chapman Private Wealth Group will showcase artists and their work from all different mediums in an effort to raise much needed funds for the Southern Georgian Bay women's shelter, My Friend's House.
My Friend’s House provides shelter, crisis support and advocates for equity for women and children in the South Georgian Bay area experiencing gender-based violence and abuse. In 2024/25, 42 women and 27 children accessed the shelter, they received 3894 crisis calls (1468 information and support calls), 119 women accessed transitional support, and 83 children and Youth accessed individual and group counselling. This is an important initiative for the community.
The List of Reasons To Remain Cautious & Defensive*
There remains significant complacency out there – the S&P 500 is retesting all-time highs in the amid an increasingly complacent investor base, who are collectively maintaining bullish sentiment that is not necessarily warranted given the slew of market risks right now.
Doug Kass (who runs the well-known hedge fund Seabreeze Partners) noted the long list of uncertainties that investors face. And with a starting point of a 22.5x price-to-earnings ratio, investors are potentially underappreciating and under-pricing risk:
- “We face the highest geopolitical risks in many decades (which will not be resolved quickly).
- We face the largest level of social and political risks in the US since the Vietnam War.
- We face the greatest chance of “slugflation” (slowing economic growth and sticky inflation) since the 1970s.
- We face the biggest threat that the US dollar and capital markets will no longer be a “safe haven” in modern history.
- We face the greatest debt load and deficit ever—and neither party seems to favour any fiscal discipline whatsoever (and Canada too).
- We face the largest capital spending spree in history (on artificial intelligence) though the return on that investment is less certain.
- We face a viable alternative to equities in fixed income (for the first time in 15 years) as bonds present an equity-equivalent yield with limited risk and volatility.”
And we should would add tariff and trade policies – not just US but global trade which is shifting. And US consumers aren’t feeling great – Michigan’s Index of Consumer Sentiment was stuck at one of its worst readings on record for two months this spring after plunging 29% in the first four months of 2025. Over the 79 years of the survey, a drop this large this fast has almost always predicted a recession. These figures have improved recently however since Trump noise has decreased a bit.
Case in point – travel has always been one of the best early indicators of a turn in the economy, because it is an expensive most easily deferred ... Airplane travel, measured by passenger traffic through TSA checkpoints is now down year over year:
Even given all these headwinds, investors remain giddy, and focused on US stocks. US exposure still makes up 64% of global equity markets. US equities are one of the largest most liquid positions of investors globally. Hope we don’t find out what happens when flows reverse.
Globally, investors are now "all-in" on stocks with the highest equity allocation in history:
Source: Market Ear
And, finally, valuations – oh boy, the elephant in the room. A holistic measure of multiple measures of long-term equity valuation, which reached an all-time high at the start of the year, still sits at its 84th percentile in data going back over a century. Non-U.S. markets present cheaper valuations by historical standards. U.S. forward P/E ratios are off the charts in comparison to other markets:
Looking at just the US market, it’s pretty much expensive on all metrics. But this doesn’t mean every sector is expensive…
I noted in the opening monologue that passive investing will continue to be challenged in my view. It has happened before it could happen again – see the chart below which shows the worst 20 year real return periods for the 60/40 portfolio across geographies. A set and forget 60/40 portfolio will be insufficient to protect wealth across all regimes I expect.
Source: MikeZaccardi
John Hussman notes that presently, the S&P 500 price/forward earnings ratio is consistent with likely 10-year S&P 500 total returns of about zero, with low single digit returns being the optimistic case:
The history of stock market concentration like we see today is something investors should take into consideration. “Not only do periods of high concentration and relative valuations lead to heightened volatility, but they have also led to disappointing long-term returns commonly referred to as ‘lost decades’,” reports the CFA Institute.
Finally, this is a big one, and cornerstone of my messaging – traditional portfolios won’t be stable return generators you’ve been used to in the past 15 years. We’re going back to normal, and we’re already there:
Source: Daily Shot
But Here Are The Positives To Consider*
There are always positives to consider, and most of the time the market looks over the precipice of worries and headwinds. The big one is valuations, which are a concern more for longer term potential returns (not a great timing tool). Current valuations may not be as much of a headwind to forward returns as some would assume, using history as a guide. With the S&P 500 once again testing 22+x forward 12-month EPS, we can examine historical P/E ranges and their implications for forward 12-month returns over the last 30 years:
- Barclays notes that while average returns decreased (and the variance of those returns increased) as valuations rose from 10x to about 21x, returns actually improved modestly as forward P/E crossed over 22x, up to about 24x. They think this is because the S&P 500 has typically traded at these levels for sustained periods in the aftermath of fast selloffs and subsequent V-shaped recoveries (1998 and 2020 being prime examples), and 22x could be a good approximation of where bears capitulate and “animal spirits” fuel the chase for additional upside, assuming EPS growth does not drop below zero.
The ’sell America’ theme seemingly came and went pretty quickly, to a point. Investors thought that everything America was tainted, and for good reason. There were fears of foreigners dumping US Treasuries largely when bonds moved significantly around the tariff threats.
But concerns of meaningful foreign selling are overblown. Zooming out in the chart below, while foreigners remain the largest holder of the U.S. Treasury market, their share of the total has technically been in a steady decline for years. It peaked in 2008, in fact, at 57% of $5.8 trillion. Since then, while foreign holdings have more than doubled, debt held by the public has nearly quintupled—i.e., demand for Treasuries has broadened out over the past decade. Among today’s diverse pool of buyers: mutual funds (18%), financial institutions (15%), the Fed (14%), and households (10%). Meanwhile, for all the recent attention on anti-U.S. sentiment in markets, zoom out a second time with Exhibit 3B: Foreign holdings of U.S. Treasurys hit an all-time high of $9 trillion in March 2025, the last available month of data. That’s $233 billion higher than February and nearly a trillion higher than just a year ago.
