The most immediate reason is the concentration of market leadership. The “Magnificent Seven” tech giants now account for more than 35% of the S&P 500, while the top ten companies make up nearly 40%. The gap between the S&P 500 and its equal-weighted equivalent is just shy of 10%, while the Magnificent Seven themselves have delivered a combined return of roughly 27.6% year-to-date. The comparison to the dot-com era is easy to make, but the fundamental difference is profitability: Apple, Google, Microsoft, Amazon, Meta and others continue to generate substantial earnings and hold enormous balance-sheet reserves. This profitability has helped anchor market confidence.
Figure 1 Growth of the Magnificent Seven as a part of the S&P 500
Another factor is the lag in how economic data reflects policy changes. Despite the risks tariffs pose, the full impact has not yet shown up in backward-looking data like GDP or employment reports. Investors expecting an immediate shock instead found resilient quarterly numbers, reinforcing confidence rather than shaking it.
Figure 2 Effective tariff rates over time, from the Yale Budget Lab
Figure 3 Widening wealth disparities between households and consumer spending
This combination — delayed data effects, high concentration of consumption, and sustained AI investment — has helped keep investor sentiment resilient, even as negative signals accumulate beneath the surface. It has also masked the risks of allowing speculative dynamics to develop largely unchecked.
Figure 4 Growth of Personal Consumption as a percentage of GDP
Concerns about an AI bubble are growing. Estimates of total AI investment now exceed $3 trillion when considering capital expenditures, valuations, and related infrastructure spending. Commercial use cases outside of a few sectors remain limited. Some firms have begun participating in “circular funding arrangements,” where they invest in each other’s AI initiatives to reinforce perceived valuations. Even industry leaders acknowledge the speculative environment: Sam Altman, the CEO of Open AI has said there is likely a bubble, while Jeff Bezos has called this a “good bubble” that will still produce transformative breakthroughs.
History suggests that speculative cycles are remarkably resistant to logic. They often convert skeptics into participants, including professional money managers who join in under client pressure. Market bubbles resemble the proverbial frog in a pot: the danger rises slowly enough to dull caution.
Yet they also resemble the “watched pot” that never seems to boil. As long as new capital continues to flow into AI-linked investments, momentum can persist. Predicting the end of a bubble is famously difficult — markets can remain irrational longer than investors can remain solvent.
So what should investors do? Awareness of rising risk is the starting point. We may not be able to time the end of the AI boom, but we can examine investor behavior for signs of speculative excess.
Consider Tesla. After the election, the stock surged nearly 98% in six weeks on enthusiasm linked to political alignment and narrative momentum. Since then, sales have weakened, profitability has declined, and competition has intensified — yet the stock remains 10% above its level on inauguration day and has more than doubled off its lows. Tesla’s valuation continues to reflect belief in future breakthroughs rather than current operational performance. It is a clear illustration of narrative overpowering fundamentals — a hallmark of speculative markets.
Figure 6 Tesla stock performance from November 4, 2024 to November 4, 2025
If this environment feels uncomfortable, it may be time to review portfolio risk exposure. Reducing equity risk comes with trade-offs — especially missing out on momentum-driven gains — but clarity on long-term goals can help prevent emotionally driven decision making.
Market manias are difficult to avoid and even harder to detach from when others are benefiting. The antidote is a disciplined investment plan that emphasizes long-term objectives over short-term excitement. In a world where the water may be warming around us, it is better to be a watcher than the frog.
These are just some of the headlines and subjects floating around the internet. Depending on who you are and where your political allegiances lay, the answers will be self-evident. Trump is either a an economic genius and unparalleled negotiator, or he is a clumsy and indifferent conman masquerading as successful businessman and politician.
For investors this presents a real challenge. These questions aren’t just thought experiments. Depending on the answers they may significantly impact where one chooses to invest, and the more polemical the question the farther we may get from a useful answer, regardless of politics. If our goal is to ask questions to reveal truth, we may find ourselves confused as to why markets have surged back from their lows (as of May 12th the major US indices have almost recovered from their tumble at the beginning of April) even while business reporting warns of a potential for a worsening economy.
One way to make better sense of what’s happening is to put ourselves in the shoes of Donald Trump’s administrative allies. Imagine what someone who believes in what Donald Trump is doing would say about his economic plans. Its not as though they haven’t heard economists and businesses express doubt and worry about the actions of his administration. So how would they defend them?
In my imagining I believe they would argue something like the following:
The United States is enormously rich but wastes money on cheap goods from China, and while some of these goods don’t need to be made here, America has lost enough manufacturing jobs that its worthwhile experimenting with tariffs to bring jobs back. Over the past 45 years we’ve seen countless evidence that playing by the rules of globalization reduces the ability of governments to help their most vulnerable citizens, and money has become too fluid and too willing to cross borders at the expense of their domestic homes. Regardless of what people fear, America remains the richest country in the world, with the largest consumer base, and that combined with the existing strength of the US economy will be enough to bring industry back to the US in some capacity while tariffs on junk from other countries will help pay for renewed and permanent tax cuts. Market volatility will be temporary while the economy realigns itself, but the combination of lower taxes and existing economic strength will ultimately help lift the markets even higher.
You don’t have to believe in such a claim, or even pretend this was what Donald Trump campaigned on. What I’m putting forth is a set of ideas (picked up through numerous interviews and speeches) that I believe his administration finds largely defensible and recognizable, and would be a better frame of reference for understanding their actions. Let’s start with the recent indication that GDP is contracting. In traditional economic terms, two quarters of back-to-back GDP contractions constitute a recession. We’ve had more than a few of those over the past decade, but few people would say that we’ve had recessions. The reason for this might be best expressed by Jason Furman; an American economist, professor at Harvard, and former deputy director of the US National Economic Council, in a recent editorial in the Financial Times. Outlining the importance of “Core GDP” vs “GDP”, he points out that Core GDP (actually known as Real Final Sales to Private Domestic Purchasers) better reflects consumer spending and private investment while the traditional GDP includes net exports, inventories, and government spending, all things in flux because of Trump’s new administration. So, while the GDP contracted in Q1 of this year, the Core GDP was up in the first three months.
What about rumours of empty ports and empty shelves? Reportedly Trump was shaken following meetings with the heads of three major retailers about shelves being empty if the tariff’s remain at 145% on China. Trump seems to have vacillated a number of times about the size and implementation of the tariffs, but as of today they remain intact. Asked about higher prices and fewer options Trump seemed dismissive of concerns over the Chinese trade war declaring “maybe the children will have two dolls instead of thirty dolls, and maybe those dolls will cost a couple of bucks more.”
Is Trump being dismissive? Yes, but he’s also not worried that shelves will be empty. Though shipping and imports are down as we head into May for cargo coming from China, far from alarmist rumours that docks are sitting empty there is still plenty of ocean-going traffic coming from China.
This discrepancy between a popular public impression and the on-the-ground economic reality gives room to Trump’s administration to continue ahead with ideas that remain controversial, as well as opening up investors to making mistakes in their allocations. For the time being, Trump does have a reservoir of economic and political strength to call on. He may be using that reserve up, but may also have guessed with some accuracy that the global economy will keep doing business with America regardless of whatever feathers he ruffles.
But markets may also not be calculating the longer-term direction correctly, mispricing assets and remaining too optimistic. Since Trump’s re-election markets have been shown to be placated by the promise of deferred tariffs, as though deferring them is really the prelude of getting rid of them. Trump doesn’t help this by going back and forth on their implementation, but listening to his words, and following his actions, I feel that it would be a mistake to assume that the tariffs will ultimately be rescinded.
This seems best exemplified by the announcement of the US-UK trade deal. Called “a starting point” by the British ambassador, the Trump administration has said the deal is “maxed out”, leaving in place a 10% tariff on British imports, with a reduced tariff on British cars, steel, and aluminum (the deal effectively lowers car and steel duties to the flat 10% rates, down from 27.5%).
Whether deals such as these are anything for the market to get excited about is a question that will be answered with time, like all the unanswered questions that have been introduced this year. What investors must work on is remaining clear eyed about what is happening, and resist submitting to their own partisan preferences. Trump may yet undermine the US economy, and trade deals may turn out to simply be acknowledgements of existing tariff rates, or perhaps the opposite may happen. But recognizing that reality is more mixed and that we do not yet have a clear picture about the future will promote more time tested strategies for sensible investing.
Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Walker Wealth Management, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Walker Wealth Management and covered by the CIPF. Financial planning services are provided through Walker Wealth Management. Walker Wealth Management is an independent company separate and distinct from ACPI/Walker Wealth Management.
This piece was meant to come out last week before the most recent tariff announcement. It was delayed, but the points it makes remain relevant.
Donald Trump’s actions since taking office have failed to deliver the kind of economic and market stimulation people had been imagining. For many professionals, business owners, and financial analysts, the assumption was that Trump would be good for markets and good for the economy. His other political views, like isolationism, tariffs, and sense of personal grievance weren’t great features, but he would fundamentally be bound by market and economic performance.
That faith eroded quickly as it seemed that Trump was intent on widespread and indiscriminate tariffs, targeting first America’s closest trading partners, and then reciprocal tariffs on the European Union, Great Britain, Australia, and Taiwan. Concerns that this might damage the American economy may have bought time on when those tariffs were to be implemented (as of writing Canadian and Mexican tariffs have been deferred twice, though Steel and Aluminium tariffs have gone ahead) but April 2nd remains “liberation day” according to Trump, a day when America stops getting “ripped off”.
Trump’s administration have pivoted away from the idea that Trump will be good for the immediate economy, and that a “period of transition” is on the way. During his speech to Congress (officially not a State of the Nation) Trump also said that farmers will sell more of their food to Americans, ostensibly a populist message but one more likely grounded in further declines of American agricultural export.
The markets peaked around February 19th, with the S&P 500 up 4.46% since January 1st. The Dow Jones had peaked a little earlier at 5.5%, and the Nasdaq Composite was up 3.86%, all respectable numbers for the first 45 days of a year, especially following a very strong 2024. Over the subsequent weeks markets began losing steam and saw a significant drop. From mid February to March 12th, a period of three weeks, the Nasdaq lost 13.05%, the S&P 500 9.31%, and the Dow 7.16%. Investors were worried, a recession seemed looming, and consumer confidence had plummeted.
Figure 1Market data provided by Y Charts. Data is until March 31, 2025
Yet only two weeks later markets seemed to have stabilised. Commentators were more confident and expected Trump’s tariffs to be more “focused”. Following some fairly significant government intervention, even Tesla’s shares regained some of their lost ground, and the bond market had retreated as investor enthusiasm seemingly returned. And then, at the end of last week the enthusiasm sputtered once again.
But these things have not yet fully come to pass. Trump’s way of engaging with government is dictatorial with a reality show slant. Rarely does he spell out what a policy will be and frequently defaults to the phrase “we’ll see what happens.” This level of uncertainty gives Trump room to maneuver, and allows the market to engage in its most common behavior; optimism. Trump may seem to be heading towards a recession, but there remains a chance he may change his mind. The market sell-off through February and March was not an indictment of Trump’s government. It was a reset on the risk for investors and an opportunity to reevaluate what might happen next. That leaves considerable latitude for Trump’s administration to back away from damaging policies, or double down on them.
Heading into 2025 it looked like the US economy was the strongest globally, and while the early days of the new administration seemed to have changed some of that math, what it means is that there is still lots of different ways that the year could still unfold. The United States may back away from its trade war, claiming victory with whatever concessions can be finagled. Elon Musk might be kicked out of the Trump inner circle, something that would certainly change the calculus about how the government would be run. Voters, which look considerably less impressed with Trump’s early policies, might be so angry that Republican members of the house find the nerve to push back on the administration. There are lots of potential futures.
For investors the challenge is to find a path that will allow them to navigate between the pessimism of Trump’s detractors and the optimism of his own administration. After so many positive years in the markets there is real wisdom in taking some of those profits off the table, and good investment policy hasn’t changed. Given the very strong performance out of the United States for the past five years, its likely that those investments have grown, especially relative to other equity positions. This is a good time to ensure that portfolios are well diversified and that assets are not too concentrated. Lastly, safety is something that should be given real thought to. Rob Carrick of the Globe and Mail wrote a piece arguing that if you need your money in the next five years, you should pull it out now. That advice should be tempered with a conversation with your actual financial advisor, but what all investors should be looking for is a blend of the following:
Enough equities to participate in good markets across the globe.
Enough safety that they won’t panic if markets do worse.
Enough cash to be able to take advantage of bad markets when they come up.
These three principles will look different for everyone, but should be balanced by the amount of risk you can absorb, and the ability to continue to meet your financial goals.
As we get closer to Trump’s “liberation day”, how much of Donald Trump’s policy agenda is well understood by investors is up for debate. According to Bloomberg, as well as some other news sources, retail investors followed a “buy the dip” mentality over March, while big institutional investors backed away. The market is not settled on what is going to happen, and while its tempting to say that little investors might take the biggest losses, there have been many instances of mistakes by large institutional investors. At the same time, there are many reasons to be cautious now. Though markets are off their all-time highs, they remain still at historic levels, and while the news has been quick to discuss “market panics” and “market crashes”, in truth we’ve only gone back to where we were in September. Investors should be on guard that markets can still go in either direction.
This leads to my final point. Investors will need to show patience in the face of the uncertainty. Followed to their natural ends, as I’ve outlined, many of his most aggressive policies don’t bode well for the future. But many of these policies may simply not come to pass. Markets may surprise people expecting the worst, and our own personal feelings about Trump and his administration’s actions may cloud our judgement about reality. What investors need to be is patient, and prepared.
Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Walker Wealth Management, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Walker Wealth Management and covered by the CIPF. Financial planning services are provided through Walker Wealth Management. Walker Wealth Management is an independent company separate and distinct from ACPI/Walker Wealth Management.
In 2016, Donald Trump supporters said that you should take him seriously, but not literally. His first press secretary, Anthony Scaramucci said “don’t take him literally, take him symbolically.” This defense of Trump was meant to highlight that while he may have said incredibly controversial things, much of that was just talk, and it was his message behind the words that you should really pay attention to.
But Trump himself has contradicted this view more than once, frequently saying “I don’t kid” when challenged on policy (the exact comment came about in 2020 over coronavirus testing). In other words, Trump has let people know that you shouldn’t be surprised when he does do things that seemed initially outrageous. For the wider world this has meant that you should take Trump at his word, and that even if some of his rhetoric is just that, rhetoric, you would be foolish to ignore the substance of his messages.
Since his re-election Trump’s focus has been squarely on tariffs, promising them on China (a further 10%), on BRIC nations (100%) and Canada and Mexico (25% each). He’s suggested that some of the tariffs can be avoided for Canada and Mexico over better border controls on drugs and illegal immigrants, but whether this is true is unknown. Political commentators like David Frum have pointed out that Trump’s views on trade have been consistent since his first considered run for the presidency in 1987, that he is hostile to trade and sees it as a zero-sum game.
In 2025 world leaders and policy shapers believe Trump should be taken both seriously and literally. While the current political situation in Canada has been turbulent, the view of the government and provinces is almost unanimous (Quebec and Alberta remain the perennial opponents to joining the band wagon). Doug Ford took the initiative to announce that Ontario could stop energy exports to the US in the event of a trade fight, a position seconded by BC’s premier David Eby.
But in the United States the threat of aggressive and expanding tariffs have also been taken literally, notably by Jerome Powell of the Federal Reserve. On December 18th, in a move that shook markets, Jerome Powell did announce a final rate cut for 2024, but stressed that future cuts were heavily dependent on inflation, which will likely rise if Trump enacts his regime of trading tariffs. Markets were quick to react, and though 2024 will be remembered as a pretty good year for investors, the speed and size of the market sell-off was newsworthy, being the largest since August.
The next morning and markets began on a relatively positive note, continuing a trend of brief panics followed by long yawns as markets simply resume their upward momentum. Little seems to have dissuaded the bull market since 2022 and with the US economy still showing itself to be very strong there’s every chance that the brief panic on December 18th was just that, a moment of panic at the end of 2024. But Trump, like the rest of us, doesn’t live in longer and slower news cycles. Instead market panics live on in social media, and run the risk of coalescing into counter narratives that Trump might hurt the economy more than help it (its notable that the economy has been very strong under Biden, but that didn’t change the perception that Trump had been the better economic steward).
In 2018 Jerome Powell began raising rates to blunt the sharper edges of a hot economy and return interest rates to somewhere near a historic norm. Since 2008 rates had remained at emergency low levels, and there was a genuine concern that markets were becoming addicted to cheap cash. In October of that year Jerome Powell made clear that rate hikes would continue until the Fed felt they’d reached a neutral rate, news not well received by the stock market. From October to the end of the year the S&P 500 lost 18% by December 24th, before rebounding slightly by the New Year. Markets had posted decent returns to the end of September, but wiped out those gains and finished the year -6.24% . During the last months of the year Trump made repeated efforts to pressure Powell to halt or cut rates, often publicly over Twitter.
My opinion is that Trump likes the ambiguity surrounding his pronouncements. Whether he actually intends to implement all the tariffs he’s discussed, whether they are bargaining positions, or whether he can be talked out of them is a grey area that offers him a position of strength. Politicians may be particularly vulnerable to his vagaries since they often wish to protect the status quo while Trump feels free to be a disruptor. But that grey area only works as a negotiating tactic so long as people believe that deals can be reached. If nations come to believe that Trump is serious and literal about tariffs and don’t believe they can be avoided, you are only left with a trade war. Similarly if you are in charge of the Federal Reserve and believe that Trump will do what he says, then you have every reason to pursue positions that curb inflation.
Following Trump’s election Jerome Powell was asked whether he would resign as the Federal Reserve chair, and was clear in his response; he will not, he is not required to leave, and cannot be compelled to. Trump already has a difficult and publicly hostile history with Powell, and its easy to imagine that if Powell is taking Trump seriously, he will move into direct conflict with Trump because of his policies, not in spite of them. Similarly conflict may be around the corner on diplomatic issues for the exact same reason. If Mexico feels it can’t avoid a trade fight with the US, you can assume that Mexico might be less interested in working to curb migrants at the US border. In Canada the same might be true, negotiating with someone who has no intent to make a deal (or honor the one already made) is not likely to build support for concessions.
Today Trump will take office following his inauguration, and he’s expected to sign a number of executive orders kicking off his next term. He has posed as a disruptor, and has nominated a number of other unusual thinkers and people opposed to the status quo to make up his cabinet. Whether they all take those roles and can do what they say they plan too is yet to be seen, but on December 18th we may have gotten some insight into what that future might look like, a future where Donald Trump is taken at his word, both seriously and literally.
Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Walker Welath Management, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Walker Wealth Management and covered by the CIPF. Financial planning services are provided through Walker Wealth Management. Walker Wealth Management is an independent company seperate and distinct from ACPI/Walker Wealth Management.
As summer has worn on there have been a growing number of headlines focused on Toronto’s stagnant condo market. In short, the number of units for sale continues to grow as buyers refuse to pay the elevated prices being demanded by sellers. Interestingly sale activity has been stagnant and prices haven’t really moved despite the growing inventory.
The knock on effect has been a significant slow down in new developments. This has led to growing concern that prices will rise in the future as new supply is postponed or canceled, and pressure is growing to get interest rates lowered to help stimulate buyers.
All of this sounds a touch too convenient for me. One of the reasons (not the only reason, but a significant one) we face a “cost of living crisis” is that housing has increasingly been seen as an investment, one that people have had greater faith in than other traditional assets. But housing booms aren’t new, and it seems odd to me that our chief concern about a growing glut of over-priced condos will be that condo prices will be higher in five to ten years. A more pressing concern is likely that condo investors, and the banks that have provided the mortgages, are deeply concerned that if buying doesn’t resume property prices could take a serious decline, erasing Canadian wealth and forcing Canadian banks to write down balance sheets.
2024 has been a disappointing year for Canadian economic news. Aside from the headlines above, one of the most striking statistics is that Canada is losing economic ground per capita. Much of our GDP growth is coming from high immigration, in effect importing new economic activity but at a rate below what is needed to expand the economy on a per person basis, and it has been doing so for more than 2 years. We are, in effect, in a “per capita recession”.
Since 2022, interest rate increases have pummeled the economy, particularly real estate, which has grabbed a lot of headlines. But Canada’s real estate market has shown considerable resilience through the first few years. However, investors that over are extended and feel the building pain from higher borrowing costs are starting to exit their investments. That hasn’t been altered by the recent interest rate cut which has yet to stimulate much new buying activity. Pressure is building from sectors of the economy to see rates fall and hopefully ease or reverse the effects of higher borrowing costs, but it remains to be seen whether rate cuts can happen at a pace both responsibly and fast enough to substantially change the direction of Canada’s economy (if it can at all).
On Monday, August 5th, changes in interest rates from the Bank of Japan reportedly triggered an unwinding of a popular “carry trade”, in which large institutions borrowed money in Japan for low cost, and then invested that money in US stocks. A hike in the BoJ’s lending rate had forced up the value of the yen, forcing the sale of those same US investments to pay back the now more expensive Japanese loans. Markets have recovered quickly, but it shook investor confidence, and while the explanation may not be wholly accurate, it’s a useful reminder that debt, which offers real value when used in moderation, can make economies extremely fragile. For years Canada has had the highest level of household debt to disposable income of any G7 country, and much of that was tied up in housing. What happens next is anybody’s guess.
Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Walker Welath Management, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Walker Wealth Management and covered by the CIPF. Financial planning services are provided through Walker Wealth Management. Walker Wealth Management is an independent company seperate and distinct from ACPI/Walker Wealth Management.
In his book The Third Horseman: A Story of Weather, War, and the Famine That History Forgot, historian William Rosen recounts the effect of the regional climate change on Europe in the early 1300s. His recounting of the history of Europe (but mostly England) in the wake of the “Little Ice Age” is fascinating and frightening. Political upheaval, inflation and famine are all magnified by the effects of a changing climate, while the uncertainty it brings dramatically alters the European landscape and its political status quo.
The little ice age saw a general cooling across much of Europe, a shortening of the growing season, an increase in heavy rains that flooded land, rendered marginal farmland unusable, and a spiking in grain prices forcing cereals to be sourced from farther away (like the middle east) to feed the northern parts of the continent. It also saw the loss of some industries, like England’s wine producers. The reputation for terrific French and Spanish wines, and the English reputation for drinking them in great quantities is forged in the shadow of the this geographically specific climate alteration.
Until now.
According to the Financial Times Britain is seeing a surge of vineyards opening, as far south as Sussex and as far north as Scotland. In 2023 the country recorded its largest ever grape harvest, while the country’s largest winemaker, Chapel Down, is looking to sell more shares to fund further expansion of its business.
Over the last decade I’ve made the case that climate change is really about water and its predictability. It is interesting to note that in the mass of worrisome predictions, of the potential for war, for famine, and for a less secure and more fragile world, that one of the less expected outcomes might be a change in cultural identity of a whole nation; that one rainy little island may stop being rainy, and undo 700 years of a cultural identity.
Updates: Real Estate
In 2020, one of the first things I wrote in at the beginning of the lockdowns was about the Canadian real estate market, and whether lockdowns and a pandemic might unravel our condo market. Though the lockdowns were long lived, Canadian real estate survived helped in large part by the extension of emergency levels of interest rates. The cost of living crisis and the housing bubble, ever intertwined, got worse, not better.
Condo prices reached their peak in January of 2023, and fell back to a current low by late April. Since then prices have fluctuated somewhat, but have been largely range bound. Reported by the Toronto Star on June 14th, “the number of new listings for condos has increased 30% since last May” the bulk of those in the investor size, ranging between 500 to 599 square feet. Urbanation, a trade publication for real estate states “In the past year, unsold new condominium supply increased 30%, rising 124% over the past two years.” In addition “projects in pre-construction during Q1-2024 were 50% presold, down from a 61% average absorption over a year ago, and 85% two years earlier.”
The Globe and Mail wrote on June 29th that “there were 6350 active condo listings in the city, an increase of 94% from the previous May” and that “condo inventory 70 per cent higher than the 10-year average for last month.” The deterioration in the condo market is being felt by existing owners and investors, as well as developers whose per square foot costs run roughly $500 higher than existing condo values.
All this seems to be aligning with a secondary real estate problem; office and commercial real estate. Across the United States as well as Canada office real estate is also struggling. Though not news, employees refusing to return to work and companies downsizing their real estate foot prints has had a significant impact on owners of office space. Banks are unloading office loans, REITs are trying to sell unprofitable assets, and some, like Slate Office RIET just defaulted on $158 million of debt. The story of real estate, once the most unflappable asset an investor could hold, continues to unfold in surprising and worrying ways.
Updates: Markets
With half the year behind us market performance has significantly diverged. US markets, being carried by the strong performance of NVIDIA as well as the handful of usual tech company suspects, have delivered shockingly great results. At the end of June the S&P 500 was up 14.48% so far. An impressive return, but 70% of those returns are from six companies, and 30% of the return is from just one. The S&P 500 Equal Weight return, an index that assigns each company a proportional weight, only has a return of 4.07%. That 70% difference in performance is down to Nvidia, Microsoft, Apple, Amazon, Google (Alphabet), and Facebook (Meta).
Figure 1 Performance data from Y Charts
The concentration of that performance makes the current rally fragile, though curiously other global indices, including Canada, are actually more concentrated than the US. This may account for why the TSX is only up 4.38% for the year, and had briefly dipped as low as 2.66% in June. Canadians are familiar with the feeling of having one of three industries (banking, energy, or materials) often set the tenor of a year’s returns. If the price of oil is climbing or falling, its often immediately reflected in our market index returns. In their own way the S&P 500 has taken on some of these characteristics.
Investors should know that markets continue to offer considerable upside, but those returns are coming from fewer and fewer parts of the economy.
Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Walker Welath Management, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/Walker Wealth Management and covered by the CIPF. Financial planning services are provided through Walker Wealth Management. Walker Wealth Management is an independent company seperate and distinct from ACPI/Walker Wealth Management.
April was a turbulent month for markets. Having begun 2024 with an abundance of enthusiasm about the prospect of (very near) interest rate cuts from central banks, an improving economy both domestically and abroad, and resilient employment, 2024 promised the fulfillment of a long-held dream; for the central banks of Canada and the United States to tackle inflation without causing a recession.
Though recessions seem to not be lurking in the immediate vicinity, the best-case scenario for the year is now fully off the table. Several months of higher-than-expected inflation numbers have caused markets to reconsider their earlier optimism and contemplate some of the more pessimistic predictions for economies.
In turn, US markets shed several percentage points through the first two weeks of April, not wiping out the year’s gains but reducing them by about half. Bond markets, having placed bets on rate cuts and longer duration bonds have retreated as well, wiping out gains for the year and forcing bond traders to retrench into safer, shorter duration positions.
Markets have steadied since then, and have been encouraged by Jerome Powell’s statements that the Fed still intends to cut rates, but the earlier optimism about many cuts totalling more than 1% for the year seem unlikely, and even now we will need more data in the coming months to trigger the first cut that had been anticipated for the early year.
Why is this, and why have markets been so easily convinced that rates were bound to fall so quickly?
There’s no obvious single answer. Like many issues surrounding complicated problems a multitude of events, including human bias and the best of intentions have formed the foundations for a great deal of misunderstanding. For the Fed’s part, it has remained committed that data will drive all interest rate decisions, a sensible argument but one that has tied their hands. Investors and analysts have shown a natural bias of optimism, and have assumed that with the bulk of inflation easily defeated through 2022 and 2023 that the final pieces would fall easily into place. This optimism has not learned from the recent past, as 2023 began in much a similar way, with anticipation of rate cuts happening in the second and third quarter of the year only to have rates start increasing in May.
But after these more human problems, what remains are a series of headwinds that will likely be with us for the foreseeable future. While prices of many commodities have fallen from their peaks, and “supply chain constraints” are no longer choking the global trade network, the world is fundamentally different than its was before 2020. China’s relationship with the West is now more openly antagonistic, and a combination of “reshoring” or “friend shoring” is ensuring that costs will be higher than they were in the past. Food prices have continued to rise, with sometimes opaque reasons. In some instances there are clear justifications for higher costs, like bird flu affecting American egg prices or higher gas charges pushing up the cost of shipping. But other times it seems that prices have risen because grocery stores simply can. Finally, commodity prices, while lower than they were in 2021/2022, remain above pre-covid levels. This applies especially to the price of energy, which seems set to stay elevated for the near term.
Performance of the 1 year WTI contract – Source: Bloomberg
Underlying this remains some larger issues about inflation’s presence in our lives before 2020. As I’ve previously written, many parts of our society were experiencing inflation long before CPI began to worry economists and other experts. Prices of physical goods had been falling for decades, but price of homes, child care, education, and food had all been climbing over that same period. The price of housing might be better if governments took a more active role in getting the cost of development down, but permits and other government fees now account for anywhere between 20% (CMHC estimates) to 60% when all taxes, red tape, permit costs and development charges are accounted for, a lucrative source of funds for municipal budgets.
Additionally, since 2008 interest rates had been at “emergency levels”, the lowest borrowing costs of any time in history. Those near zero rates, which were intended to help remove slack from the economy and encourage large capital expenditure instead stimulated enormous share buybacks among major corporations. Instead of new jobs and a hotter economy we got increasing share prices and more corporate debt.
Problems that take a long time to form do not get fixed quickly. Repeatedly markets have shown an impatience for corrections and are quick to assume that pauses in inflation must mean that the trend of higher prices has both been beaten and that interest rates can fall back to previous emergency levels. Even if interest rates are at sufficient levels to regain control over the direction of inflation, it still doesn’t mean that rates can fall quickly, and the longer rates stay elevated above the emergency levels of the past, the deeper and more costly current interest rates become to the economy.
In Canada low interest rates helped stimulate an enormous increase in property values through the 2010s and into the pandemic. Higher interest rates threaten those gains and as we go through 2024, almost 60% of mortgages will have renewed into more expensive loans since rates began climbing. Even if interest rates begin to fall, homeowners can expect that the cost of borrowing will be much higher than they’ve been for many years. Between the desire of home owners to keep house values high, municipalities to keep their tax bases stable, and banks to ensure that the value of properties they’ve underwritten don’t move too much, the pressure to get inflation down runs squarely into our own self interest.
The urgency and desire for lower interest rates are real, but so are the headwinds that keeps inflation pressure high.
Walker Wealth Management is a trade name of Aligned Capital Partners Inc. (ACPI)* – if applicable ACPI is regulated by the Investment Industry Regulatory Organization of Canada (http://www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (http://www.cipf.ca). (Advisor Name) is registered to advise in (securities and/or mutual funds) to clients residing in (List Provinces).
This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
Investment products are provided by ACPI and include, but are not limited to, mutual funds, stocks, and
bonds. Non-securities related business includes, without limitation, fee-based financial planning services; estate and tax planning; tax return preparation services; advising in or selling any type of insurance product; any type of mortgage service. Accordingly, ACPI is not providing and does not supervise any of the above noted activities and you should not rely on ACPI for any review of any non-securities services provided by Adrian Walker.
Any investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. The information contained does not constitute an offer or solicitation to buy or sell any product or service.
Since late February the bulk of global attention has been focused on the Russian invasion of Ukraine. The invasion remains ongoing, and will likely last for months, potentially even years, and represents the most dangerous geopolitical situation we are likely to face until China tries to enforce control over the South China Seas or invades Taiwan.
But while our attention has been narrowly focused, interest is growing about how the world’s second largest economy is choosing to mange the late stages of the pandemic, a series of choices that have ramifications for much of the world.
China has had mixed luck with Covid. By the end of 2020 it looked as though China might be the only winner economically from the pandemic, but 2021 turned out to be a year for the West. First, Western vaccines, particularly the mRNA vaccines were highly effective, while the Chinese vaccine produced domestically had only a 50% success rate. The Chinese government also was hyper critical of the more effective Moderna and Pfizer vaccines, essentially precluding them from Chinese use. This has left the country in a difficult spot. Chinese mandated lockdowns have been brutal but effective, leading to uneven vaccine use. The low infection rates that the “Covid Zero” policy has delivered has also robbed the country of natural immunity. Today China, already struggling economically, is still locking down whole cities in the hopes of containing outbreaks.
Chinese lockdowns are also worsening global inflation. The supply chain disruptions caused by the most recent lockdowns in Shanghai are dramatic to say the least. In the above picture each yellow dot represents one cargo ship waiting to be docked and unloaded. Supply chains were already deeply stressed when Shanghai went into lockdown last month, and the global impact of further supply disruptions is something we’re very likely to notice.
This image came from early May
Lastly, some months ago (October 2020) I had detailed how China’s foreign policy, which was heavy handed and often petulant, was angering nations all across the globe. China may not view the world the way its geopolitical rivals do, but its inability to grasp at least what might be considered fair or just by other nations is damaging its own ability to wield soft power, an essential part of being a global hegemon. China’s decision to back Russia in its invasion of Ukraine likely reflected China’s near-term goals of retaking Taiwan and its general contempt for the current world order. However, the global resistance to the Russian invasion, the support shown Ukraine and the barrage of negative publicity (as well as realizing that an untested military in countries with lots of corruption may not be able to score quick military victories) must serve as a wake-up call to China’s ruling class. As of 2022 China seems to have squandered much of its international good will and is unlikely to find many willing allies for its global ambitions.
China seems to be suffering on all fronts. 2021 was a bad year for China’s economy, cumulating in the public meltdown of one of its biggest developers in November. But everything, from its politics to its public health policies are working against it. The world’s second largest economy, one that is the largest trading partner to 130 countries, can’t seem get out of its own way, and as it falters it can’t help but impact us.
Walker Wealth Management is a trade name of Aligned Capital Partners Inc. (ACPI)*
ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). (Advisor Name) is registered to advise in (securities and/or mutual funds) to clients residing in (List Provinces).
This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
Investment products are provided by ACPI and include, but are not limited to, mutual funds, stocks, and bonds. Non-securities related business includes, without limitation, fee-based financial planning services; estate and tax planning; tax return preparation services; advising in or selling any type of insurance product; any type of mortgage service. Accordingly, ACPI is not providing and does not supervise any of the above noted activities and you should not rely on ACPI for any review of any non-securities services provided by Adrian Walker.
Any investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. The information contained does not constitute an offer or solicitation to buy or sell any product or service. 16 Past performance is not indicative of future performance, future returns are not guaranteed, and a loss of principal may occur. Content may not be reproduced or copied by any means without the prior consent of the author and ACPI.
Markets have been falling through the year, and despite some encouraging rallies the trend so far has been decidedly negative. The NASDAQ Composite, one of the three big indexes heavily tilted towards technology companies had a -23.86% YTD return as of Monday, May 16th, a minor recovery after it had reached a low of -27% on Thursday of the previous week. The Dow Jones and the S&P 500 have YTD returns of -10.31% and -14.82% respectively. The question for investors is “what to do?” in such markets, especially after some of the best years despite the pandemic.
A closer inspection of the markets however shows that while there have been some steep sell offs reflected in the broad market, the real market declines have been far more concentrated. And while there are many different market headwinds to choose from when it comes to reasons for the recent selling action; inflation, interest rates, geopolitical strife, COVID-19, maybe even Elon Musk, the sector that has been sending markets lower has been the tech sector.
Over the past couple of years the companies posting the biggest gains in the markets have been tech companies. Apple stock (AAPL) was up 88.97% in 2019, 82.31% in 2020, 34.65% in 2021, and is down -11.6% so far in 2022. Amazon (AMZN) was up 76.26% in 2020, and has fallen -30.18% this year. Facebook, now META Platforms (FB) gained 56.57% in 2019, 33.09% in 2020, 23.13% in 2021 and has lost -38.08% in 2022. Netflix was up 67.11% in 2020, and a further 11.41% in 2021 but is down -68.74% this year. Tesla, which had an astounding 743.4% gain in 2020 and another 49.76% return in 2021 is so far down -17.36% in 2022, how long can it resist gravity? (All prices and YTD performance were collected from ycharts.com on May 6th, 2022).
I predict that we may never fully understand how the pandemic changed thinking and why stock prices climbed so much, but the reality was that many tech companies benefited from people staying home, going online and the changing priorities that coincided with not having to be in offices and commuting. Tech companies that became huge like Shopify (SHOP), which allowed traditional retailers to become online retailers, benefitted immeasurably from the lockdowns. But it too has seen its stock decline this year by -69.59%, pushing the price back to where it was in December 2019.
Markets are facing other risks too. Inflation, which seems to be running at about 8%, can threaten economies as people buy fewer items due to cost increases. Interest rate hikes, which are meant to ultimately curb inflation by restricting monetary supply and reduce lending/economic activity have hit bond markets particularly hard. Higher interest rates mean higher borrowing costs, and its here we might hypothesize about some of the unintended consequences of the incredibly accommodative monetary policy that the pandemic introduced. That might be that investors were able to borrow to invest, and the threat of both rising interest rates and stumbling returns will only hasten the exit of money from the market by some investors. Higher borrowing costs will also have another impact on markets, as a sizeable amount of stock market returns over the past decade have come from share buy backs, funded in part by low-cost borrowing.
Having said all that, economies are still looking very strong in the present. Earnings have remained high, jobless claims continue to fall, and while we’ve seen a spike in costs the ability to address those inflationary pressures may not be something that can be easily done through monetary restricting.
There are many different sources of inflation, but two significant issues are not connected to “cheap money”. Instead we have issues that are primarily structural and represent the failure of political foresight. The first among these has to do with oil. Since the price of oil fell in 2014, infrastructure development has stalled, heavily indebted producers have retreated, and now Russia has been closed off from much of the global market. This confluence of events has unfortunately arrived as economies are reopening, global use nears pre-pandemic levels, and global refined supply is at historic lows. There is no simple solution for this, as the only remedy is time (and development). In theory, Canadian and US oil could make up much of the global need, but for a multitude of reasons neither country is in a position to rapidly increase production.
Similarly, supply chain disruption and the heavy reliance on offshore manufacturing have meant that there is no simple solution to production problems occurring in other nations. China is the key issue here, with an enormous grip on much of global supply on many items and their current insistence on a “Covid Zero Policy” China is effectively shut to global business. This means ships can’t get into port, and with-it products cannot make it to market.
Higher borrowing costs seem unlikely to handle this problem. High gas prices and lack of supply may be inflationary, but high borrowing costs can’t target those issues. Instead, higher interest rates and the threat of more in the future are hitting the parts of the market that have been pushed higher by cheap credit. The stock market and the housing market.
If markets seem to be moving independently of economies, its possible that won’t stay that way for long. As previously mentioned, higher energy prices are not controllable by higher lending rates. But higher energy prices can introduce demand destruction, a fancy way of saying that economies shrink because prices get out of control. Oil is still in high use and its needs go far beyond powering cars. In fact internal combustion engines only account for 26% of global oil need, meaning those higher prices for crude, if they get too high, can have wide inflationary impacts to the entire economy.
Higher lending rates may also lead to a substantial economic reset, especially for Canadians who have much of their net worth tied up in their homes. With almost 50% of new mortgages in Canada variable rate mortgages, home prices having skyrocketed in the past few years and with most Canadian debt connected to homes, the risk to home owners is very real. Can the Bank of Canada tame inflation, orchestrate a soft landing for the housing market and keep the economy chugging along? Such a question invites highwire act comparisons.
So what’s happening with markets? Perhaps we are simply correcting a narrow subset of the market that got too hot through 2020-2021. Perhaps we are seeing the dangers of printing too much money. Perhaps we are seeing the realities of people buying too many index ETFs. Perhaps we are witnessing people being too fearful about the future. Perhaps we are too fearful of inflation or interest rates. Perhaps we are on the brink of a recession.
Perhaps, perhaps, perhaps.
But let me offer a slightly different take. Investing is frequently about connecting your needs as an investor with the realities of the world. As Warren Buffet famously said, in the short term the stock market is a voting machine, in the long term a weighing machine. If you can afford risk, you can be risky, and with that comes the potential for significant market swings. If you can not afford risk, then your portfolio should reflect that need. If you cannot stomach bad days, potentially weeks or even months of bad news, then you need to find a way to keep your investment goals aligned with your risk tolerance.
When I started this essay we had just completed one of the worst weeks of the year, which bled into the second week of May. As I finish this piece markets are in the process of rallying for a third day, posting modest gains against the backdrop of significant losses. It would be nice if I could end this with some confidence that we’ve turned a corner, that markets had bottomed and that the pessimism that has led to so much selling is evaporating as people come to recognize that stocks have been oversold. Yet such prognosticating is the exact wrong tack to take in these markets. Instead, this is a good time to review portfolios, ensuring that you are comfortable with your risk, that your financial goals remain in sight and that the portfolio remains positioned both for bad markets, and for good ones too.
If you have any concerns about how your portfolio is positioned and need to review, please don’t hesitate to contact us today.
Walker Wealth Management is a trade name of Aligned Capital Partners Inc. (ACPI)*
ACPI is regulated by the Investment Industry Regulatory Organization of Canada (www.iiroc.ca) and a Member of the Canadian Investor Protection Fund (www.cipf.ca). (Advisor Name) is registered to advise in (securities and/or mutual funds) to clients residing in (List Provinces).
This publication is for informational purposes only and shall not be construed to constitute any form of investment advice. The views expressed are those of the author and may not necessarily be those of ACPI. Opinions expressed are as of the date of this publication and are subject to change without notice and information has been compiled from sources believed to be reliable. This publication has been prepared for general circulation and without regard to the individual financial circumstances and objectives of persons who receive it. You should not act or rely on the information without seeking the advice of the appropriate professional.
Investment products are provided by ACPI and include, but are not limited to, mutual funds, stocks, and bonds. Non-securities related business includes, without limitation, fee-based financial planning services; estate and tax planning; tax return preparation services; advising in or selling any type of insurance product; any type of mortgage service. Accordingly, ACPI is not providing and does not supervise any of the above noted activities and you should not rely on ACPI for any review of any non-securities services provided by Adrian Walker.
Any investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. The information contained does not constitute an offer or solicitation to buy or sell any product or service. 16 Past performance is not indicative of future performance, future returns are not guaranteed, and a loss of principal may occur. Content may not be reproduced or copied by any means without the prior consent of the author and ACPI.
Two weeks ago Russia began its invasion of the Ukraine in earnest. What had begun in 2014 following the ouster of a corrupt pro-Russian government was followed by the annexation of the Crimea and then the fermenting of a civil war in the Donbas region of eastern Ukraine, finally cumulating in his goal of retaking the entire country and bringing it back under Russian purview, most likely in the form of a puppet government.
No one has been more successful at undoing Russian strategic goals than the Russian government. Putin had once hoped to establish a new Warsaw style pact, he hoped to undermine NATO, he’d longed to set up an Eastern European economic zone to compete with the EU. To imagine that any of these goals could today be defined as likely is to dabble in fantasy. His ultimate goal, at least defined by his own comments, was to restore Russia to its previous status as a respected superpower like it was under the Soviet Union. Today it seems as though his army, impressive and large though it is, has already met its match in conventional warfare in the early days of its Ukrainian adventure.
While the military side of his invasion doesn’t seem to be going according to plan, something that must have really taken him by surprise was the resolve he faced globally. Though NATO has said it won’t get involved, weapons are flowing into the country. Nations, like Finland and Sweden whom Russia has treated as extensions of its old empire, are making loud noises that they too would like to join NATO. Germany, long a NATO laggard has promised to increase its military spending above the target 2% of GDP for NATO members. The notoriously neutral Switzerland has said it will freeze Russian assets, and throughout the world condemnation has been swift, especially on the financial front.
In the space of a few days Russia didn’t just find itself diplomatically isolated, but financially as well. The international banking system has been effectively closed to Russia and its central bank, putting a stop on many of its rainy day funds it will need to sustain its campaign. I won’t endeavor to explain the full range of how the global bank sanctions work, as the process is complicated and other better versed people can explain it more succinctly, but the truth is that the Russian state is deeply isolated and in financial chaos.
Markets have responded to this chaos with a fair amount of volatility, with some big swings both up and down since the invasion began. This is understandable, but what comes next will be more unpredictable. Russia does not have many face-saving ways to undo its situation, a fact that has not gone unnoticed by many. Stuck in heavy fighting in Ukraine, a collapsing economy, a restless population at home and a kleptocratic network of military officials and billionaire oligarchs who hide their assets in Western nations, Putin may find himself backed into a corner with few options open to him, some of which were likely previously unthinkable.
Sun Tzu, famed military strategist and author whose book sits unread on the shelves of tedious hedge fund managers.
I’m reminded of a saying from Sun Tzu, the famed military strategist of ancient China, whose book on strategy is often “required reading” for a certain type of hedge fund manager. “When you surround your enemies, leave an opening; do not push too hard on the enemies who are desperate.” Even if Putin is ultimately successful in Ukraine it’s hard to see what kind of victory can be cobbled together on the world stage. Russia will need a way out, an opportunity to exit and with walls closing in our own “Western” victory of aiming to contain Putin may create more chaos than we are expecting or can anticipate.
I don’t want to be alarmist, but the nature of war is to be unpredictable, and cautious investors should take note that we are still in the early days of what could prove to be a long, protracted, and ultimately surprising conflict that has many unknowable outcomes, some of which may leave the world order changed, for better and worse. Putin has unleashed something, and what that is can not be fully guessed.
The Walker Report 