Tariff Madness

March 2025 Newsletter

In this Newsletter, I discuss the tariff madness in the market and why my portfolio is now over-performing.

The predictions of most Market Analysts regarding the tariff situation were wrong. They doubted that the US would implement tariffs against Canada, Mexico, and China… because why would the US apply tariffs that would ultimately hurt their own economy?! The logic behind the predictions was sound, but politics is not always about logic or making sense.

I’m not an expert in politics, so I will limit this discussion to what I do know well, such as the effects of market shocks and how to deal with them. I will leave the discussion about the stupid things that politicians do to others.  If you recall, unlike most Analysts, I predicted that the chances of tariffs being implemented was 50/50.  As I previously mentioned, the tariff situation was not game-able; in other words, there was not enough information to make a decent market bet one way or another.

Now That Tariffs Are In Place, What Does That Mean?

If left in place over time, these types of economic shocks tend to lower consumption, thereby lowering earnings, stock prices, and even standards of living. However, the effects of tariffs can be mitigated over time as companies find alternatives such as shipping goods to non-tariff countries, to be eventually resold to the USA.  In addition, new markets can be made abroad, consumer behaviours can be changed, and other workarounds happen over time. 

What About Now?

It is still early in the year and quite honestly, there has not been any significant stock return damage.  We are still close to all time highs, and only down Year to date by a few points.  There is lots of noise and drama, but market moves like we have seen used to be called “Thursday”.  When new data becomes available in 3-6 months, we might have much bigger market moves.  Alternatively, if tariffs become regarded as just a bad experiment and everything goes back to the way it was, or tariffs are just relaxed a bit, we could see big swings upward.  

But There Is More

Even without considering the effects of tariffs, cost cutting by the government (such as the US is doing now) typically isn’t good for the stock market.  This is because cost cutting means removing government stimulus from the economy.

If you add the shock of tariffs, it’s arguable that North America could be pushed into a recession, or at the very least, a no/low growth scenario which will be doubly bad for stocks. 

If it is going to be a big down year, then we will see a reversion to the mean on many popular stocks and market sectors.  All those US darlings that have ultra high PE ratios will get hit hard. A rotation into defensive stocks will prevail as well as a flight to fixed income like T-Bills and bonds.  For the first time in years, international stocks will likely (already started) outperform US stocks.

Effects On My Portfolio

As many of you know, I have been de-risking my portfolio through diversification, lowering average PE ratios, rotating into defensive sectors, buying unloved sectors, etc. As a result of these changes, my portfolio is over-performing against the S&P500 index by about 7 %. I consider the portfolio closer to an “all-weather portfolio”, as it’s an eclectic combination of equity positions.  It’s not a grouping that you would expect to over-perform by so much in normal times.  

I was surprised by the volatility of the market and the fact that it gave up all its gains for the year so quickly.  Usually the honeymoon phase for a new president lasts for at least half of his (or her ;)) first year.  I thought that I was going to be at least a year too early with my defensive positions. It’s been very difficult to structure the portfolio in a way that acknowledges the extra market risk while still participating in what was a strong rising market. It’s always a compromise one way or another when investing.  No one can know the future.  Being too defensive (all cash) or too bullish (high tech USA) could devastate your average returns if you lose your bet.  The right answer lies somewhere in between, where the small investor can keep compounding returns safely. 

How Is The Market Reacting?

In the last month, the Consumer Staples sector was the best performer, followed by Healthcare, and Real Estate.  The worst sectors were Consumer Discretionary, Communications and Information Technology.  It just so happens that the winning sectors were all overweight within my portfolio.  Similarly, the worst sectors were underweight within my portfolio.  Will this trend continue?  I honestly don’t know, but its nice to see a strategy play out as expected because there were so many possible outcomes.

What Are Canadian Investors Doing?

Canadian investors are selling US stocks and either buying Canadian or International stock. Is that a good idea?  Yes and no.  The majority of the world’s value in public companies is dominated by the US at ~ 60+ percent.  To exclude that market from your portfolio is likely a good way to underperform in the long run, as it means the you have less opportunity to find good companies. A counter argument is that US markets have become too expensive and now have become uncertain. 

What About the American/Canadian Exchange Rates? Should We Be Getting Out/In?

There’s an argument that the Canadian dollar will fall drastically as a result of the recent tariffs.  But it’s a relative game against the US dollar.  Year-to-date, the Canadian dollar has gained slightly against the US dollar, which isn’t what was expected.  The US dollar is set to experience some volatility, so its difficult to predict where your money is best invested.  I wouldn’t necessarily move all your money back to Canadian denominated stocks.  Diversification is still your friend.  

What Am I Going To Do Next?  

1. Prior to the tariff silliness, I was already lowering my exposure to the US market, especially in the expensive sectors. I have dropped my US weighting down to 42% and will drop it below 40% shortly.  This is far below the world average of 60%+.
2. If you read my last Newsletter, I developed a simple Energy Strategy as a way to lower my overall risk.  The strategy involved being overweight in Energy and underweight in more expensive positions.  Energy is out of favour and may provide some shielding in the event of a big down draft in the market.  I believe that in the long run, it will likely provide some big gains.  See my recent purchase (below) of MEG Energy, a Canadian oil and gas play.  Although not immune to the savagery of the market, MEG is likely to do well in the long run. Oil has fallen below 70$ US per barrel and I am prepared to buy more MEG should prices fall below $60 US per barrel.  I sold KRBN to fund MEG. I still like KRBN but I feel that there is more opportunity for MEG.

Final Thoughts

Its getting bumpy so stay diversified; less emphasis on expensive US positions, more emphasis on international stocks, Canadian stocks, and losing sectors like Energy.  

Elbows up!

Marc’s Monthly Moves

Sell

• KBRN carbon credit ETF (Sold to fund MEG purchase)
• ISRG (sold because it was expensive and to fund cheaper RMD)

Buy

• MEG Energy
• RMD (makers of CPAP machines)

Marc’s Portfolio YTD Performance

• Portfolio return: 3.2% (including currency loss)
• Portfolio return: 3.5% (without currency loss)
• S&P 500 return: -3.64%
• RSP ETF S&P equal weight -.79% 
• TSX: +.97%

The portfolio is over performing the S&P500 by 7.14 % points.