We hope you and your family had a great holiday in December and are enjoying the mild winter to start 2025.
2024 will go down in the books as a great year financially for most risk assets. U.S. markets led the way but decent returns in Canada and in fixed income added to total returns. As we look forward to the year ahead there are many opportunities but there are potential pitfalls that could derail our outlook. The last number of years you have heard us talk about increasing U.S. and international exposure and we have shifted it from our Canadian equities. Now with the looming tariff threats from the President Trump administration, those changes should help cushion the portfolios for what is ahead.
We have been receiving many calls asking us what we should be doing with portfolios with the threat of tariffs being implemented. We have been responding that it is very difficult to be proactive when we don’t know what the tariffs will be positioned as and what areas of the economy they will affect. We believe there may be some short-term tariffs, but we do not think it will be something that will be in the news at this time next year, we believe it will be a short-term phenomenon. When you look back to the first term of the Trump administration remember that Trump looked to the U.S. stock markets as a barometer of his success. If he implements policies that make the markets go down, we expect he will reverse them. Many economists agree that tariffs hurt both sides of a trading relationship.
We’re also being asked about what we believe the Canadian dollar will do going forward. We think there is a risk that the Canadian dollar will go lower in the short term if broad based tariffs are put in place, but we do expect the Canadian dollar will likely be higher by the end of the year. If you look at Trump throughout history, he has believed that the U.S. dollar should be weaker for U.S. companies to be more competitive. He has never been a strong dollar advocate. The U.S. dollar has been trending higher against all major currencies in the last year or so. Last week we saw Trump say that when inflation goes down due to his policies, he will demand interest rates go lower.
We believe that inflation will continue to trend lower this year and that will allow the U.S. Federal Reserve to cut interest rates more than currently expected, which should allow the U.S. dollar to soften against major world currencies. If the U.S. dollar does continue its strength, we will likely see U.S. multinational companies starting to raise the alarm that their sales in foreign countries are going down in U.S. dollar terms. If that happens, we will likely see a correction in the markets and Trump will be demanding the U.S. dollar go lower. Speaking of corrections, we have gone over two years now without seeing a 10% or greater correction. Typically, 10% or greater correction occurs at least every 18 months. We likely will see one this year, but we do not yet know what the trigger for it will be. Even with a correction we still believe that the markets will end up higher for the year and corrections are a healthy part of any market.
The other big topic we keep discussing with clients is Bitcoin. The Trump administration is a pro crypto currency administration so many are excited about the outlook for the space. Our Chief Market Strategist Dr. Jim Thorne has been an advocate for the space for quite some time and has been correct to this point that cryptocurrencies will be adopted further into the mainstream. We have been hesitant to implement the investment into our portfolios because we haven’t been able to see the utility for it and it does not have any cashflow or earnings. Major financial firms have been increasing the availability of products that derive their return from Bitcoin. In Canada we have had Bitcoin Exchange-Traded Fund’s (ETFs) for a number of years and in the U.S. ETF’s were launched in 2024 that hold bitcoin and one of them has been the fastest growing ETF to ever hit US$100 billion dollars in value. To put it in perspective the largest gold ETF has a value of over $125 billion but it took over 20 years to get there. The space continues to grow very quickly but there is a high degree of risk in it. Traditionally when times are good like they are now cryptocurrencies have done very well, but when we hit times of turbulence there have been many instances when they have lost 90% of their value. If you have an interest in the space, just remember it is a very high-risk sector and any money you expose to it should be looked at as risk capital as you could lose all of it in the event of a recession or liquidity event.
To summarize we are positive on the outcome for this year but expect more volatility than we saw in the last number of years. In the first four years of Trump’s first term, we saw more volatility in the markets as there were many threats and promises to make America great again. We did see the markets trend higher overall through his term. We are starting from a different valuation point than we saw in 2017 when he first came to office. It is unlikely we will see the same types of returns that we saw last year, but the U.S. economy continues to look resilient and that should help company profits trend higher, and the equity markets should follow suit. If we are correct that inflation continues to soften that will allow interest rates to trend lower which will provide a tailwind for our bond positions.
Today we are seeing a major correction taking place in the AI themed companies. With the amount of money that has concentrated in that space over the last couple of years corrections can be violent. It was triggered by AI competition in China that may or may not prove to be disruptive. We will monitor the situation and make changes as required. As mentioned, we do expect this year to be more volatile and this is an example of it.
We appreciate the continued trust and support that you show our team. We take it very seriously and make it our goal to provide the service you have grown accustomed to and the best risk-adjusted returns we can provide. If you have any questions about your individual situation or would like to review your portfolio further, please let us know.
We hope you enjoy the rest of the winter and have a great 2025!
Mike, Craig, Darren, Brent & Paul
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