We know that many of our clients are concerned about the recent sharp drop in the stock markets in both Canada and the US. The last six weeks have seen the most precipitous slide in prices in the past few years and it is far from clear what will happen next. We do not have any special ability to tell the future, but we have been doing this for a long time, and I hope our experience can help bring some perspective to the situation.

The first thing to recognize is that although your portfolio could well have fallen as much as 6% in the last six weeks, for the year to date very few of our client portfolios are down in value by more than 3%. Clients with 20% or more of their portfolios in fixed income will see the stabilizing effect of that asset class: bonds are up a small amount, helping to combat the volatility in equities, as they are supposed to do.

The second thing to appreciate is that we have had two consecutive years of rapid growth in equity values. Markets do not go up more than 20% two years in a row very often. It is normal to expect a pull back, and markets are very good at finding a reason to correct. That accounts, in part, for the rapid revisions in prices.

Finally, it is important to understand that the most violent price moves have been in the growth-focused end of the market. The so-called “Magnificent Seven” stocks have, in particular, seen some very nasty falls. Tesla has seen its market value cut in half and AI chip maker Nvidia has fallen as much as 25%. Our clients do not own either of these stocks, and although most do own some of the other five of the big seven, we have carefully pared back our holdings as prices have gone up to ensure that our clients remain well diversified and are not over-exposed to any one company, or indeed, any one market sector.

Markets go up and down for lots of reasons, some of which can be understood and forecast, and some of which are apparently random. When the economy is in recession and company profits are falling, we expect stock prices to go down. That is not the case at the moment. Company profits for the year ended Dec. 31, 2024 were very strong and although we are seeing some caution in company forecasts, most economists are not betting on a recession at this point. Markets can also react to mispricing of stocks. This happened with the “Dot Com Bubble” in 2001-2002, when NASDAQ technology stocks plummeted by as much as 80%. Most of these stocks were market newcomers with no record of profits or even sales in some cases. In 2008-2009 a major market crash was caused by the mortgage lending crisis in the US, which saw a number of major banks and other lenders fail due to bad credit practices. In 2020 the declaration of a global pandemic the markets into a brief but violent swoon that saw as much as 50% drops in stock prices in as little as six weeks.

In our estimation, there are no conditions similar to these in the market today. Certainly, there are small companies in the artificial intelligence sector that are very speculative, and some of which are undoubtedly over-valued. Our view is that everything connected with cryptocurrencies is highly speculative and subject to very rapid depreciation in value. However, the great majority of public companies are priced rationally at the moment.

That leaves the elephant in the market, the behavior of President Trump and his administration. We cannot possibly predict what he might do next. We suspect he does not know what he will do next. We do think he is sensitive to the opinions of the Chief Executives of major companies, who have his ear. We think he is also sensitive to his personal popularity. We know that at this time he is being told that his tariff ideas are bad for the US economy, bad for US consumers and bad for his standing in the polls. Even Republican elected officers are being subjected to voter discontent.

We do not know if this will have an impact. The on again, off again tariff announcements have caused terrific uncertainty, which markets hate, and this almost certainly added to the downward trend and high volatility.

Our long-time clients know that we never sell into market downturns. We have confidence in our process and in our research. We know the companies that we own very well, and we expect that all of them will weather the storm, albeit with some battering and bruising along the way. Market timers, as we have often repeated, face three insurmountable obstacles:

  • Nobody knows when to sell. You could be too late or you could be too early.
  • Nobody knows when to buy back. The same problem as selling, coupled with a natural hesitation to go back into stocks too early. Most market timers go back too late or not at all.
  • High taxes on selling. The stocks that are the most volatile will be the ones with the largest capital gains. Selling crystallizes those gains and results in a loss of capital (taxes paid in cash to the government) that can never be reinvested.

We have been in the portfolio management business almost thirty years, and the truest thing we can tell you about the current market climate is that this too shall pass. Good companies make money over time and their stock prices rise. The best thing we can do is maintain our discipline, follow our time-proven process, and face market pain with stoicism. Turning off the stock market monitor and watching less news will help.