LOOKING AHEAD TO 2025
November was wonderful for investors. All of our clients will likely find that their portfolios are at record levels as of November 30th, with the most aggressive accounts up as much as 9% or even 10% for the month. That’s a pretty good return for a whole year. The US market cheered the election results, and Canada followed along. A robust earnings season and optimistic outlooks from most of our portfolio companies added to the upward momentum. All the major indexes hit all-time highs.
Quite naturally, many investors are concerned that this is all too much of a good thing, and that there will inevitably be a market downturn. Of course they are correct. There will be a downturn, but it is impossible to know when, how deep it will be, and how sharp the subsequent recovery will be. Most of our clients appreciate that we are not involved in market timing. We buy and sell individual stocks based on our evaluation of the company, its sector, and the economy as a whole. Market timing is simply too hard, and there is little evidence that anyone can do it successfully on a consistent basis. On top of that, the new capital gains tax rates in Canada (should they ever be passed into law; they are still up in the air at this date) mean that attempts at timing have become that much more expensive. Money paid in taxes is gone forever.
As we look towards 2025, there are, as always, lots of questions. Here is our take on some of the major issues facing investors in the coming year.
- Interest Rates. We think the Bank of Canada will continue to ease rates throughout the year. The Canadian economy is quite weak and record high consumer debt levels are constricting growth. The prime rate will likely fall by 1% by mid-year, and perhaps by 2% by year end. This is broadly positive for banks, which will have more room to expand their interest rate spreads, and for high dividend paying stocks. Investors in bonds and other fixed income products will see their yields decline, although not to the level we saw during the COVID crisis.
- Canadian Dollar. We expect the Canadian dollar to trade lower as interest rates in Canada fall faster than those in the U.S. The tariffs proposed by President-elect Trump are a wild card. We do not expect them to be enacted as they would cripple the North American auto industry and cause gasoline and other energy prices to rise sharply. If they are enacted, the dollar could fall to the levels seen in 2002 when it hit US$.62. For this reason, we will continue to emphasize U.S. stocks in our equity portfolios.
- The Magnificent Seven. The giant technology companies that have been the main drivers behind the strong markets this year are highly valued, but for a good reason. They are tremendously profitable and have unrivaled market power. It is very likely that the incoming Trump administration will drop the anti-trust lawsuits and other regulatory actions that have been seen as overhanging issues. We expect to maintain significant positions in five of these companies.
- Energy Prices. World energy consumption continues to rise, and we see no end in sight. There are significant shifts to renewable energy, solar in particular, and a growing interest in nuclear. However, the role of oil as a transportation fuel will continue as the uptake of electric vehicles appears to be slower than some had anticipated. Natural gas and liquified natural gas (LNG) will continue to replace coal as fuels for base electricity generation. We expect to see somewhat stronger natural gas prices but the lifting of drilling restrictions and the easing of regulations in the U.S. may lead to excess supply, so this is a very hard sector to predict. What we do know is that fossil fuels will not disappear in the short run.
Markets are impossible to predict in the short term. We only have to look at the experience of the past four years to see how quickly and how sharply prices can change direction. The horrible stock market in 2022 gave way to a two-year boom we are still enjoying. While we cannot tell you anything about what might happen to stock prices in the near future, we have considerably more comfort in forecasting the long run. Quite simply, over longer periods stocks go up, and the best companies go up the most. There is simply no substitute for those building wealth over time. The price one pays for that growth is the not infrequent and sometimes very painful periods of market decline. The rewards are well worth that price.
Happy holidays and we wish you a healthy, happy, and prosperous New Year.
David Baskin
Chairman
Media Appearances
Barry Schwartz on BNN Bloomberg’s The Street – November 6, 2024
Barry Schwartz on BNN Bloomberg’s The Close – November 11, 2024
Barry Schwartz on BNN Bloomberg’s The Open – November 29, 2024
Podcast
Catching up on Apple, Berkshire and Garmin
Taking a position in TransDigm
Tracking Berkshire’s Portfolio + Your Questions!
Interesting Reads
What really motivates us is not what you think – Fast Company