Reblogged from Brintab
This fall the economy and the markets were undisputably fixated on the US election more than anything else. As the promises on both sides of the aisle scaled the cliffs of outrageousness, in the end the Republican platform prevailed and they swept the Presidency, Senate, and House of Representatives.
There is no doubt in my mind that many of the election promises by Candidate Trump will be walked back by President Trump either because they are not achievable or not actually desirable. We have already seen, for example, Republican voices acknowledging that solving Ukraine is not going to be achieved “in 24 hours” as was promised. What a surprise.
Now many in the investment industry are trying to figure out the realistic outcome of the more economy-linked positions. As a case in point, the across-the-board 25% tariffs on everybody is now looking more likely to be varying tariff rates limited to specific products from specific countries. The new regime has undoubtedly come to realize (no doubt thanks to American businesses that have their ear) that the proposed tariffs would not only hurt trading partners but have potentially devastating impacts on the US economy.
It would certainly seem that they don’t want the economy in a tailspin exactly when they go into midterm elections. The Republicans only have 2 years until a probable Democrat resurgence in Congress and various proposals could not be implemented without Congress (and in some cases without a supermajority). They will need to proceed carefully to achieve the successes they are hoping for without shooting themselves in the foot.
Because there were so many outlandish campaign positions and it is not clear what will actually happen, markets are likely to be up and down a bit (a.k.a. volatile) in the near term as investors try to read the tea leaves of the unfolding new US policy. For us, this implies needing to consider being nimbler than our typical long-term investing focus, although that is not our preference or bias.
Bonds and Interest Rates
The overnight rate established by the US Federal Reserve hit its peak of 5.33% back in August 2023 and stayed there for a year before the Fed started lowering rates from the plateau in August 2024. The Fed continued dropping overnight rates through this fall but long-term bond rates did not follow suit. Basically, long term bondholders felt inflation has not yet been totally vanquished and they feared the Fed would have egg on its face, having to revert to raising rates again when inflation resurfaces. This was a particular concern once the Republican clean sweep was evident because the Republican ideas related to stripping out red tape are thought to be pro-economy and likely pro-inflation too.
Long term rates rose because investors did the math thinking that short term rates would need to rise back up sooner rather than later. Remember that when rates rise, bond prices fall. See below the behaviour of the purple line in December.
Fig. 1: Bonds-Med. term Cdn-blue, Corp-green, High Yield-orange, Long Term US-purple – 2 years – Yahoo Finance
We acted quickly the morning after the US election having a trade ready before the market even opened to sell a significant bond position we held. Although we lost a bit in the turmoil, we avoided a significant backslide and have just this month bought back some bond position at a lower price. Interestingly, even though Trump is thought to be a pro-business leader, in his past presidency of 2016, just like this time around, bonds briefly sold off from election day to inauguration and then rose up for the year after that. If this inauguration is a repeat there will be money to be made in bonds.
Currencies
This autumn the Canadian Dollar fell against the US Dollar, ending the year at around 69.49 USD/CAD or 1.44 CAD to buy a USD. Canada was not alone. The USD strengthened this quarter against the Pound, Euro, and Yen too. Overall we can say that the US economy has held up stronger than other economies lately, powered by a strong IT industry and discretionary spending. That won’t last forever.
Last quarter I wrote that the CAD could toy with the 0.70 USD range and here it is. Although it could conceivably dip a bit lower I feel it is near the bottom. Just after the yearend we liquidated some US investments to purchase Canadian investments and part of the logic was the modestly priced CAD. There might be more of that shifting from the US to Canadian investments.
There are a few factors that could stall a recovery in the CAD such as:
• The position of the next Canadian government on economic issues, including oil
• Whether the US attitude of pump more oil includes importing more from Canada or just pumping domestically
• Outcome of the US global tariff wars with respect to Canada
• Upcoming NAFTA2 renegotiations for 2026 (which could conceivably be rolled into the tariff driven negotiations of 2025)
• Re-emergence of Russia and Iran as oil exporters, depending on the US approach to each
Fig. 2: US Dollar Index (green) and USD vs CAD (blue) – 2 years – Yahoo Finance
Currency moves are notoriously difficult to predict and so we try not to delude ourselves in that sphere. Our long-term strategy has always been to leave our US investments unhedged because when stocks go up the US Dollar tends to go down and vice versa. Hence the USD exposure implied by owning US stocks has helped smooth out overall returns. This is the first time in about the past 2 decades where I felt it wise to de-emphasize the USD and it is just a general leaning, not an attempt to pick the exact moment when the USD fades and the CAD rises up.
Stock Markets
Over the past 2 years the stock market laggards (in the chart below of five countries) has been particularly the UK and somewhat Canada. Japan really did well until early 2024 and then roughly flat-lined. The outperformer has been the US, with the performance heavily concentrated in the “magnificent seven” tech stocks.
As I mentioned in the bond discussion above, as soon as the Republican clean sweep was evident on November 6th we quickly liquidated a significant bond position and redeployed capital to equities. Such moves are not typical of our more long-term focus but it seemed the situation warranted it. As a consequence portfolios likely performed a couple percent better last year than they would have with a simple weather the storm mindset.
Fig. 3: Equities: US-purple, Can-blue, Jpn-red, UK-yellow, Germany-green – 2 yrs – Yahoo Finance
Now there are signs that “magnificent seven” dominance and the “Trump trade” are starting to fade and that is one reason that we liquidated some US equity investment in early January 2025 in favour of Canada. The Canadian market is not the only place with opportunity but broadly speaking I would say we are going to see a “changing of the guard” in 2025 in terms of stock market leadership. That is largely a reiteration of my perspective at the end of the last quarter but picking new investment opportunities will be a judicious and patient process.
Respectfully submitted,
Paul Fettes, CFA, CFP, Chief Executive Officer, Brintab Corp.