DIARY OF A PORTFOLIO MANAGER
February 24, 2025
“We didn't start the fire
It was always burning, since the world's been turning
We didn't start the fire
No, we didn't light it, but we tried to fight it”
-We Didn't Start the Fire, Billy Joel

I am looking at some possible concert road trips for Spring 2025. Heart & Cheap Trick,
Paul Simon, Billy Joel & Sting. Look at this list… all of them have been actively
performing since the 1960s and 1970s and still going strong. Not sure what the
takeaway is here but hopefully I make it to one or all.
This is an interesting market. We saw a sell off this due to reduced guidance which is
not unexpected. What is interesting is that the volatility index (VIX) seems unphased.
What is also interesting is the investors are “bearish” while the stock market is at all time
highs which is a bit of a dichotomy. We measure bearishness by an AAII survey or
bears vs bulls. Historically, when bears outnumber bulls by 15% and the S&P 500 is
within 1% of all time high (admittedly a rare occurrence – 11 times since 1987), the
forward return averages 16%. Let’s see what holds true for the next 12 months.
Investors always need to manage with risk and uncertainty. However, the rewards are
there for those who are patient. Nevertheless, the noise level through the first few
months of this year has admittedly felt higher than normal. The threat of tariffs, a
surprise development in artificial intelligence, higher U.S. inflation, and a major shift in
U.S. policy with respect to the war in Ukraine, among other things, are just a few of the
challenges that we are working through this year. But, global equity markets have been
resilient in the face of these issues and are higher year-to-date. Moreover, government
bond yields are close to the levels they were at to start the year. And, the beleaguered
Canadian dollar, has shown signs of life of late as it has strengthened recently.
Tariffs continue to be on everybody’s mind. Despite many threats, the U.S. government
has undertaken one action so far: an additional 10% tax on Chinese imports (the U.S.
had pre-existing tariffs on Chinese goods). Yet, the risk of new tariffs remains and the
U.S. is expected to revisit its plans for Mexico and Canada in early March. It is planning
tariffs on all steel and aluminum imports later next month, and it seems tempted to
bring Europe into its crosshairs in the not-too-distant future. Markets have thus far taken
the view that the worst-case scenario has already been avoided: wide ranging tariffs
that were expected to be enacted over a month ago. Instead, delays, extensions, more
targeted tariffs, and exceptions have emerged as the strategy so far. Should this persist,
the approach seems consistent with what was experienced during President Trump’s
first term in office. Let’s not forget, we had this experience from 2016-2020 and came
out reasonably well during that time.
On the artificial intelligence front, a Chinese company, DeepSeek, unveiled an AI model
that demonstrated impressive performance relative to leading models developed in the
U.S. It quickly surpassed OpenAI’s ChaptGPT as the most downloaded application on
Apple’s App Store. The company suggested it was able to develop its AI model at a
fraction of the cost of U.S. models. Moreover, it succeeded despite significant
constraints as the U.S. government had restricted its ability (given it is a Chinese
company) to access some of the world’s most powerful chips. It served as a reminder
that innovation is alive and well in China. It also raised more questions around the
significant amounts of capital that continue to get deployed by U.S. technology firms.
That led to some volatility in the tech space. Given elevated valuations of tech stocks
that reflect high expectations, and the level of concentration of the tech sector within the
U.S. market, we expect developments in AI to remain very important for the U.S.
market.
Another challenge investors had to grapple with recently was the U.S. inflation reading
for the month of January. It was higher than expected and the breadth of inflationary
pressures also widened, suggesting a broader range of goods and services are
experiencing some pricing pressures. While it’s just one month worth of data, investors
will undoubtedly be watching to see if these pressures persist over the months to come.
These views were shared by members of the U.S. Federal Reserve who suggested they
are reluctant to lower interest rates any more until further progress on inflation is made.
Global equities have performed well despite these headlines. It suggests markets are
looking past the noise and continue to have confidence in the earnings growth potential
over the next few years. However, we do not think investors should be complacent in
the wake of the market’s resilience. We continue to watch for additional signs that
corroborate the market’s strength. One such indicator is rising market breadth, which
would suggest that an increasing number of stocks are making new highs.
Should this occur, it would help confirm that the bull market for stocks continues to be
on solid footing.
Have a great weekend
Regards,