Kristy and I had a great week in Mexico over spring break. Sipping margaritas on the patio while watching the sunset over the ocean, all while whales passed by and the rays jumped, was soothing for the soul. I felt refreshed and ready to get back to work. One week later, I already feel like I need a holiday again!
Trump bump, to Trump slump to Trump dump. We’ve officially moved from “correction territory” to a full-on market “crash,” with the major indices dropping over 13% in three days and pushing us down over 25% from their peaks. It’s the most significant market drop we’ve had since COVID.
I love the expression that “history doesn’t repeat itself, but it rhymes,” especially regarding stock market cycles. In my investment career, which spans over 27 years, I’ve gone through the tech bubble bursting, 9-11, the Global financial crisis from subprime mortgage and US housing collapse, COVID, and now Trump tariffs. All very different crisis’, but all followed the same pattern.
Every time we have a crash, it feels like the sky is falling. Every crash starts with something the market hasn’t predicted and doesn’t know how to price fully. Market prices that we see today reflect where investors think the economy and businesses will be a year from now. Markets are able to digest bad news that they have at least experienced before, but something new, that they can’t forecast or quantify, stresses them out.
This financial crisis is different from the last few (as they all are!) in that it is entirely man-made. One man-made, to be more specific. “Liberation Day,” as Trump calls his tariff announcements, was pretty horrifying for markets in that instead of offering any sort of clarity regarding a clear path forward, it just seemingly confirmed that there is no real plan. Markets are throwing a tantrum in reaction.
Tariff rates were set based on a nonsensical formula that takes how much a given country sells to the US (exports), subtracts how much that country buys from the US (imports) to calculate the trade deficit, and then divides the trade deficit by that country’s exports to the US. Then, it was roughly divided in half, with a minimum of 10%, and the odd country was exempted for special circumstances. The formula is insane. It says that if you sell more to the US than you buy, you must be doing something unfair, and they will punish you.
It would be the equivalent of you going to dinner with a group of friends and then setting the amount you tip your waiter by adding the number of forks and then dividing that by the number of items on the menu you didn’t order. Imagine the confusion and frustration of trying to get your dinner companions to accept your formula for setting the tip, threatening them that you will double it if they disagree, and then scale that up to be of global importance to get a bit of an understanding to the reaction of the market to Liberation day. There is probably a bit of a smirk on Canadians’ faces. We weren’t exactly caught by surprise by the tariff announcements as we have had our own preview on the joys of new US trade policy. We can take some small solace in the fact that the US/Canadian trade conflict was nothing personal but rather one small part of a Trump campaign to alienate everyone.
I asked Chat GPT for an analogy for markets trying to understand the tariffs, and it came back with this: “Market confusion over Trump’s tariffs is like trying to bake a cake with instructions written in invisible ink. Investors are scrambling to figure out the recipe for success, but every time they think they’ve got the measurements right, Trump adds another surprise ingredient. “ That’s a pretty solid assessment!
Imagine setting a fair price today for what a business will be worth in six months against the current uncertainty, and you have an idea of the problem. When there is extreme confusion, markets will price in the worst-case scenario. Currently, that means that investors assume all the tariffs will stick as they are set out, and then every country will retaliate. We would be pushed into a global trade war with all the full economic ramifications that implies. Hence, the crash.
There’s not much we can be sure of right now, but if we step back and take the emotion out of our forecasting, we can at least discount the likelihood of the worst-case scenario. I certainly don’t have a crystal ball or any understanding of Trump’s mindset, but I think we can at least see the overreaction here. We know Trump wants to renegotiate tariff rates. He’s been transparent about it right from day 1. We know that Trump wants to be seen as a deal-maker, and the fact that tariff rates don’t make any economic sense signals that he is using them as an excuse to bring countries to the table for deals. The extent to which he doesn’t care that presentationally, methodologically, morally, and maybe even constitutionally, how he is going about bringing his “partners” to the trade table is idiotic is what is causing markets to react. It’s like starting a negotiation by slapping your opponent in the face and then trying to get a deal done. It doesn’t feel like the best way to approach international relations.
Some countries are still going to sign deals. Vietnam has already done so; India is at the table, and others will follow. We won’t get the worst-case scenario as I expect more countries to ignore Trump’s circus and start thinking of dealing with the US in the same vein as you would negotiate with a toddler. Just do your best for now, humour him because it is in your country’s best interest to do so, and wait for them to grow up. Tariffs will be brought back into more reasonable alignment with those countries willing to deal, and the more countries that do, the faster markets will settle.
However, it is unlikely we will get the outcome Trump wants.
There will be a cost to the US spitting on their trade partners and pretending that they don’t benefit from a globalized economy. Some countries will call him on his “tariffs” and be willing to fight a “trade war” that nobody wins. My main hope is that Trump wants a strong economy and market as part of his legacy and wants deals done. His willingness to go through short-term chaos is a negotiation tactic that will have limits. The market is throwing a tantrum in protest of Trumps tariffs and I don’t think he has the patience to play a long game. I don’t expect us to go back to the status quo, but I think we will have a lot more clarity in markets within the next quarter or two. Just knowing where things stand will help tremendously. Some countries will sign deals, some won’t, and the world will adapt. I’m hoping for a resolution for the US/Canada trade, but I will find an alternate plan to get my bourbon if we can’t find an agreement!
There are also a few positives. I’m pretty sure Elon won’t be around the White House with his chainsaw for too much longer. As painful as my own portfolio drop has been, Elon’s net worth is reportedly down about $148 billion in the last couple of months. He’s too smart to stay in the sunk cost fallacy for too long and will go back to building cool things again.
It could also be the catalyst for positive change in other countries. I brought up that the Canadian market hasn’t been good for a long time and needed a shove to get it moving in a different direction in last month’s newsletter. The European market is similar. I have heard my whole career how undervalued the European market is relative to the US. It feels like it has been “on-sale” for 25 years! The reality is that it is not as strong a market as the US. The US economy has unrivaled access to capital, business financial transparency, and a platform that encourages entrepreneurship and growth. For the most part, the EU has been in a “slow the decline” mindset, rather than “growth” for years. The trouble is that most of the EU has declining populations, restrictive business practices, and slow-moving legislation. Trying to get all the political parties in any one country to agree on anything is difficult enough, never mind getting any consensus between countries.
Trump has performed a minor miracle in uniting the world in their dislike of the US trade stance. It reminds me of going to a soccer game years ago in Germany. We were watching a couple of 2nd division German teams play a match. The game was being played in Bayern Munich’s stadium, a team in the top division of the Bundesliga, because it was a relegation game and they needed a bigger venue for a larger crowd. The game was bedlam, with fans from each side jeering, taunting, and trying to outdo each other’s chants and songs. For most of the game, you couldn’t make anything out as each time one group would start a chant, the other would disrupt it—loud and dissonant chaos. But a couple of times each half, the entire stadium crowd would unite, and the stadium would ring out clearly with the chant “Bayern Shite!”. They disliked each other, but their hatred for Bayern was enough to bring them together!
It’s certainly not an easy fix, but Trump may be the catalyst to get the rest of the world to cooperate and wean off a global dependence on US markets. I don’t think we will deglobalize the world economy anytime soon. Still, more diversification and attention to improving efficiencies in individual countries is not bad. The global economy, in general, is stronger when more individual countries are doing well.
I won’t even pretend I have any idea what happens next. There really is no way to calculate an accurate risk metric given the current state of the world. While we have no specific insight into what happens when made-up math is used as the basis for global trading, the “rhyming” part of history does give us a blueprint for handling market corrections.
We didn’t know what would be the tipping point for a market crash, but we certainly knew one was coming. History tells us that, on average, every 5-6 years, we will get at least a 20% drop. My financial career has anecdotally supported this. The exact cause is always a surprise, and we never know when it will come exactly. Still, hopefully, I have prepared you mentally for the fact that, as investors, we will inevitably go through many of them in your investment journey. Every new client I bring on gets the caveat that the only guarantee I can give when investing in stocks is that there will be years that you will not like me!
We are not alarmed by a crash, as it is factored into our planning, projections, and cash management. For those of us still investing, these are the moments we want. Good businesses are going on sale. I’m not sure if we are around the bottom or if another downward leg is yet to come, but I legitimately feel like a kid in a candy store when I look at all the companies on sale right now. We are getting a second chance to pick up good companies that have fallen back to undervalued territory. There will also be new prospects as the world shifts away from a US-dominated global market. Market crashes are opportunities to supercharge future wealth.
For those of you in retirement, don’t panic. Crashes are accounted for in our projections. There is a reason we have lower drawdown thresholds and are disciplined in how much we take out in good markets. We diversify the portfolio with cash, savings, bonds, real estate, and other alternative assets to help us mitigate the downside a bit, but mostly so that we have other spots in the portfolio that we can draw for income so that we don’t need to sell our stocks in the down cycles. Switch your mindset from thinking of market drops as money is lost to good businesses being temporarily down. And don’t look at your portfolio if it will stress you out!
We build retirement portfolios like a pension. You don’t hear of a retired teacher or nurse or even old-age pensioners stressing about whether they will get their pension cheque in months when markets crash. Yet, their money is absolutely invested in a very similar way. They don’t stress because they can’t see it, not because the pension funds didn’t go down. Pensions aren’t just designed to kick out money once; they are designed for a lifetime of income, which means they need some parts of it to grow faster than inflation so that incomes can keep up with the cost of living. That’s where the stock part of pensions comes in. Pension funds go up and down with markets, similar to a properly balanced portfolio, but the income from these accounts remains solid and dependable.
Simple to explain and may even make sense logically, but it is not an easy thing to go through, no matter how much experience you have. You will appreciate those sunset margaritas on the beach moments more when you know you have earned them. Long-term wealth creation is satisfying but very challenging. It’s time for me to get to work! Let us know if you want to connect and review your portfolio, if you can dig up some extra funds to invest, or if you just want reassurances!
Jeremy
Last week was a lot nicer than this week! Will get back here again soon!
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