Martin Pelletier: Just because the markets and economies are uncertain it doesn’t mean your portfolio needs to be as well
I’ve been paying close attention to the many financial pundits who post charts illustrating how markets inevitably rise whenever a specific event occurs, such as the 10 per cent correction in today’s environment. While historical trends can provide valuable insights, these analyses often overlook the risk of significant structural changes or shifts such as what we’re currently witnessing in American policy regarding globalism. Economist Niall Ferguson recently highlighted this in his thought-provoking piece, A User’s Guide to Wrecking the Global Financial System.
For Canada, this is troubling news. Inflation is rising at an alarming rate, with last week’s report marking the highest level since June 2024. We are now facing a dangerous combination: a weakening economy paired with surging inflation, putting the Bank of Canada in an increasingly difficult position. To make matters worse, newly appointed Liberal Prime Minister Mark Carney is pushing for an increased industrial carbon tax on goods — at a time when we are already grappling with a tariff war and economic fragility. This policy shift could significantly worsen conditions for many Canadians.
South of the border, Americans should not assume they are insulated from these developments. We at TriVest Wealth believe the United States economy has been effectively “rug-pulled” by the Trump administration and is now on a path toward recession as government spending cuts take hold and tariffs dampen consumer spending. Those counting on the U.S. Federal Reserve to intervene should be cautious — rate cuts will only come after temporary price spikes from tariffs subside, at which point the Fed will be reacting to an already weakened economy rather than pre-empting it.
Multiple economic indicators are already flashing red. Retail sales, restaurant and bar sales, motor vehicle and parts purchases are all declining. Moreover, the NFIB survey reveals the most significant drop in U.S. small business expansion plans since the 2020 pandemic. This is particularly concerning, as small businesses drive approximately 43.5 per cent of U.S. GDP. When small businesses struggle, the broader economy feels the impact.
A U.S. recession would also likely hit previous market leaders the hardest. We’ve already seen substantial declines, with Tesla Inc. down over 50 per cent from its highs and many of the Magnificent 7 stocks down over 20 per cent. While longer-term, young investors may view these sell-offs as opportunities amid extreme volatility, most of our clients prioritize capital protection. Given the risks they have taken to build their wealth, they are not willing to endure large drawdowns in their portfolios.
Given this backdrop, our strategy remains focused on managing risk and positioning accordingly. One key move has been our recent allocation to U.S. health care via the Health Care Select Sector SPDR Fund, which holds major positions in Eli Lilly and Co., UnitedHealth Group Inc., Johnson & Johnson, AbbVie Inc., Merck & Co. Inc., Abbott Laboratories, and Thermo Fisher Scientific Inc. Health care tends to perform well during recessions due to its essential nature, making it a defensive and reliable sector.
Dividend stocks are another cornerstone of our strategy. These stocks tend to outperform in recessions because they provide consistent income and stability when market conditions become volatile. They also offer something called “yield support,” which means high quality companies with strong balance sheets that are able to service a dividend during a correction. Many of the strongest dividend-paying companies are in defensive sectors such as utilities, health care and consumer staples, where demand remains relatively stable.
We have positioned ourselves primarily through Outcome Metric Asset Management’s Canadian Equity Income Fund, a rules-based fund with premium dividend yield to the TSX Composite and targeting approximately 20 per cent lower volatility than the broader market. Key holdings include Alamos Gold Inc., Wheaton Precious Metals Corp., Franco-Nevada Corp., Finning International Inc., Waste Connections Inc., and Metro Inc. It is also faring quite well this year, with 4.9 per cent gains as at last Monday.
We have also maintained significant positions in the Vanguard Value ETF (VTV) and the Simplify Hedged Equity ETF (HEQT), both of which serve different but complementary roles in our portfolios. VTV’s largest position is in Berkshire Hathaway Inc., offering a safer and diversified way to gain exposure to the U.S. market due to the positions it owns and larger cash position that can be used during any sell off. Meanwhile, HEQT has embedded put options that provide downside protection, allowing investors to stay invested while mitigating risks during market downturns.
Finally, if you haven’t yet spoken with your adviser about structured notes, now might be a good time. While they are not the most tax-efficient option, they offer attractive risk-adjusted returns depending on the specific strategy implemented.
In times of heightened economic uncertainty, prudent risk management and strategic positioning are paramount. Just because the markets and economies are uncertain it doesn’t mean your portfolio needs to be as well.
