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Best of Times, Worst of Times

Best of Times, Worst Of Times1

This Charles Dickens quote makes a great title for my current thoughts on the world and how it effects my views on investing. The Trump reality show evolves into the worst of times as he positions tariffs, Canada as the 51st state, renaming the gulf of America and owning Greenland, as threats to the world to try to best negotiate his position to make the US Great Again. When we measure consumer spending, corporate earnings growth, US productivity enhancements, lower interest rates, inflation under control and capital deployment, we conclude we could be in the best of times.

The Trump 2.0 Effect

While it makes for unique conversation in all circles, the American voter has signed up the world for four years of this political behaviour. As he creates the noise, markets will create additional volatility as a reaction to the wandering off course politics. The tariff threats are pre-emptive for future tactical negotiations. In my view, there will be tariffs, but on a tiered implementation. The supply that is readily available in the US and currently abundant, will attract round one tariffs. This should take a lot of pressure off Canada from a flat 25% on everything, as our three major exports of energy, auto and agriculture are not currently in excess supply within the US.

The other problem Trump creates with a flat 25% tariff is that it is very inflationary, and inflation effects 100% of the people as the price of goods and services increase to accommodate tariff charges. Trump campaigned aggressively to get the everyday costs of goods and services lower, so again we feel a flat 25% tariff on everything is not executable.

His desire to springboard off enhanced homeland security to have a 51st state, the Gulf of America, or a Greenland takeover is another tactic. In my view, he is shifting focus from his ability to resolve Russia/Ukraine in one day as he becomes aware he cannot accomplish this. In time this ultimately makes for better economics within Canada as we look beyond the US for new trading partners. We are still concerned for the Trump wildcard effect on markets as it elevates global uncertainty. He is creating noise in the system, and we need to weather through his tactics of negotiation.

The above is an opinion and built on the expectation that a prudent person behaviour will occur. Trump is unpredictable and therefore we will continue to monitor his implementation closely. The above could also override the positive effect of earnings growth discussed below and create a negative market. Trump believes in tariffs so he will implement some and we need to review the depth and scope of this in addition to the cycle of retaliation by trading partners, the effect on inflation, consumption patterns, interest rates, and ultimately corporate profits.

The US Economy is Robust

As we look to our investment thesis centric on the everyday companies that consistently pay and grow dividends with strong reoccurring cashflows and strong balance sheets, we project another successful year to be an investor. I tend to centre my research around the US as it continues to be the leading market for the globe. In our overview, we see many positive signals within the US market this year. We see a resilient consumer that continues to spend, and inflation under control with interest rates decreasing. Of critical importance to myself is the yardstick of productivity growth and this is presently very healthy in the US, leading to job creation and capital deployment, ultimately creating earnings growth in double digits projection for 2025 on average for US corporations. To me this is the signal for reasonable return expectations in 2025. Buy the signals, not the noise. As an investor we occasionally get caught up wanting to water the weeds and cut the flowers as a reaction to the noise. Adding to our belief in strong markets, is the amount of money that remains on the sidelines of institution money managers that, in principle, need to earn more than cash reserves presently do. This money will buy the dips as long as fundamentals remain in place. Total money market fund assets increased by $66.08 billion to $6.92 trillion for the eight-day period ended Wednesday, January 8, the Investment Company Institute reported.2

Investment Thesis for 2025 and Beyond

My overview is repetitive but as always, our core thoughts remain galvanized, and I will present a few.
  • Earnings matter to create long term fundamental values in the companies we own.
    • Crypto has no balance sheet, no earnings, and no cashflow therefore we conclude fundamentally it is not an investment, merely speculation.
    • Artificial Intelligence is real and innovative and over the next 3 to 10 years the rate of adoption will increase to continue to enhance productivity and profitability.
    • The PRO Business attitude of Trump may be a quiet shining star as global political policies and corporations synchronize their mandates for the same.
  • Picks and Shovels – Invest in the everyday
    • My last article spoke to this and take an opportunity to review it again.
    • AI is real and requires incremental investment in energy utility, cybersecurity and data storage and transmission… everyday businesses.
    • With increased corporate earnings, we expect companies to deploy greater capital into technology, dividend increases, stock redemptions and increased merger and acquisition activity.
  • Investor Behaviour & Increased Volatility
    • Trump 2.0 will create volatility. Volatility can be your friend to buy at occasional discounts.
    • Investors need to maintain confidence in the process of investing to grow and compound wealth over time. We need to own corporations that will be there for us when we need them to deliver fundamental results. We need to think of where these companies will be in 5 to 10 years and maneuver our ownership toward these forward long term views.
    • Speculators mandate all or nothing decisions that seldomly work. Predications are fun to create in anticipation of great windfalls that never happen.
    • Volatility increases sequence of returns risk therefore adding support to our process of growth buckets and income buckets as an essential portfolio strategy.
    • Invest in what you believe in. Innovation is a non-negotiable investment theme. Do not fear you own too much; fear you do not own enough with a diversified overtone.

The Bottom Line

We are encouraged for a continued resilient consumer coupled with productivity enhancements lead by technology and capital investment to see increased profitability on a broader market spectrum. Trump is the only uncertainty in this predication and the cycle of retaliation that would occur with inappropriate policies or actions. It is not our task to figure out where the market goes in the next 30 days. We need to recognize that the market is in motion with positive undertones in the fundamentals. We need to follow this opportunity signal and bypass the noise.
Todd Campbell
President, RBA

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