stock-market

July 2025 Quarterly Update

Welcome to Summer 2025.

If you look at the performance of the stock market over the past three months, you might think that everything is going quite well in our world. The reality is anything but. Consider:

Iran and Israel traded missile attacks against each other in the Middle East starting June 13.
The United States carried out strikes against Iran on June 22.
The war in Ukraine is more active than ever with both Ukraine and Russia making multiple missile strikes on each other this past month.
The humanitarian crisis in Gaza has deepened as Isreal presses its bid for control of the area.
The United States continues to wage a trade war against its major trading partners including China, Mexico and Canada.
China continues to prepare itself to take Taiwan by force. This would be a huge blow against the West and would likely embolden other nations such as North Korea to follow suit against American allies.

There is a seeming disconnect between the performance of your investments and what is going on in the world. A new meme[1] “Nothing Ever Happens” describes the cynicism that many investors feel as seemingly catastrophic events lead to little or no market movement. This phenomenon is not new.

[1] I live with four teenagers and so feel compelled to do my best to work with their language. “Meme” is a theme that is shared widely. It could be a picture, video or (in this instance) a piece of text.

Making Sense of a Stock Market that Seems to Ignore Headlines

In 1988, just as I was completing my undergraduate degree, three academics: David Cutler, James Poturba and Lawrence Summers (who served as the US Secretary of the Treasury from 1999 – 2001) published a paper entitled “What Moves Stock Prices?”. In this paper they looked at major events such as the bombing of Pearl Harbour in 1941, the Cuban Missile Crisis in 1962 and the Chernobyl Nuclear meltdown in 1986. What they found is that stock market responses were surprisingly muted as important world news was reported. (Source: Cutler, David M. and Poterba, James M. and Poterba, James M. and Summers, Lawrence H., What Moves Stock Prices? (March 1988)).

Thirty seven years after this paper was published, the results are the same: investors react to news that they believe will meaningfully impact the value of their investments. News of war generally leads to all-or-nothing outcomes which is difficult to price. Economic news such as interest rates and/or the imposition of tariffs can be more easily factored into the price of a stock.

The lesson in all of this is to remember that a headline that catches your attention may not result in a change in the value of the shares you own. This was true over eighty years ago and still true today.

How to Avoid Being Scammed

The Canadian Investment Regulatory Organization (CIRO) which regulates investment activities in Canada, issued a warning to Canadian Investors (and seniors in particular) to be careful because scammers are becoming increasingly sophisticated and pervasive. Among the tips offered, they highlight naming a trusted contact person to your investor profile. This person, who can be a family member or friend, can look out for you and assist us in giving you the best-possible advice and especially keep a lookout for scams on your behalf. In a world of ubiquitous technology and artificial intelligence, relationships matter more than ever. We encourage you to nurture trusted relationships and use them for your protection. Please reach out if you would like to add this feature to your profile.

Financial Literacy for the Next Generation

On May 31, we were pleased to host a group of young people here at our office for a seminar designed to build financial literacy and specifically explain how the First Time Homebuyers Plan works. We had several of you ask for a recording of this session which you can access here.

Prices, Currency and Interest Rates

The bank of Canada reported that Canada’s inflation rate is holding steady at 1.7%. They also held the overnight rate steady at 2.75%. This leaves borrowing costs well below the 5.00 level they were at just over one year ago and price stability that is well within the bank’s target range. I believe these conditions are positive for everyone: governments, businesses, investors and consumers. (Source: Bank of Canada)

January 2025 Quarterly Update

“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”

– Warren Buffett

I wanted to share this quote with you because I believe that one of the biggest threats to long-term investment success is paying too much attention to the value of our investments today. Our financial plans are designed to feed, clothe and house our families in the future. It is important to be aware of our portfolio values but not to make it our focus.

We at Thomson Allison want to deliver pleasing investment results to you over the long term. If seeing higher investment values in the short term seems pleasing to you, I encourage you to temper this in the same way that I would encourage you to temper your perspective had the value of your investments gone down in 2024.

In October 2022 (when markets were down over 10% year-to-date) I wrote “a decision to remain committed to a long-term investment plan is easy when markets are up, and difficult when they are down.” Our investment values have increased substantially since then. If it feels easy to be invested the way you are now, please remember that there will be times in the future where it will feel difficult. We will remain committed to our approach regardless of how we feel.

Some Themes From 2024

Monetary Policy vs Political Theatre

Some of you expressed concern that the 2024 US election results could lead to instability in our world and in the value of your investments. I wanted to provide you with some examples of destabilizing news and how efficient the stock market is at anticipating and adapting to new information:

On December 1, 2024 United States president-elect Donald Trump announced that he would impose 25% (or higher) tariffs on imports from Canada, Mexico and China when he comes to power. Stock markets remained unchanged that day.
On December 23, 2024, Donald Trump again announced that he would “lock down” the US border. He openly discussed the possibility of purchasing Greenland from Denmark and indicated that he was willing to retake the Panama canal from Panama. Stock markets were unchanged that day.
On December 17, 2024, Jerome Powell, chairman of the US Federal Reserve Board, announced an interest rate reduction of .25%. In his comments, he led investors to believe that the board may not proceed with as many further interest rate reductions in 2025 as they had anticipated. The Dow Jones Industrial Average dropped over 1,000 points (~3%) that day.

I am highlighting these three announcements to remind you that professional investors are watching, listening to and reading the news in the same way that we are. When information is broadcast that seems credible and actionable (see #3), they will move quickly and decisively as they did on December 17. They are not ignoring Donald Trump (see #1 and #2) but they do not place much credibility in his claims so they are not acting on them. Much of what we see coming from politicians is interesting to hear, but it often amounts to nothing more than political theatre and has little to no impact on our investment plans.

Canadian Dollar vs US Dollar

The US dollar and economy continued to dominate all others. Over the course of the year, the Canadian dollar dropped from over 75 cents in USD to less than 70 cents. This is a decrease of 7.95%. Most of your investments are held in US-based securities so this had the effect of increasing your rates of return in Canadian dollars. (Source: yahoo.ca/finance)

Magnificent Seven vs All Others

“Magnificent Seven” is a term that has come to represent the seven dominant technology companies in the United States. These companies are: Apple, Meta (Facebook), Alphabet (Google), Nvidia, Microsoft, Tesla and Amazon. The chart on the left shows that their combined value is close to 40% of the value of all the largest businesses in the US. Much attention is paid to these seven stocks for many reasons, the least of which is simply their sheer value. Consider, for example, the value of Apple Inc. It would cost you $5.2 trillion CAD to purchase the entire business. If you added up the value of ALL the companies listed on the TSX (Canadian stock market), it would total $4.2 trillion CAD. To be clear, if you owned one business (Apple Inc.) and sold it to someone else, you would have enough money to purchase EVERY publicly-traded business in Canada (all the banks, railroads, pipelines, energy companies etc.) and still have $1 trillion left over for spending money 😉. We remain concerned that the value of these seven companies is so overwhelmingly high. I should also note that EdgePoint does not currently hold any shares of the magnificent seven in its portfolios. In the index funds (RBC US Equity Index), the magnificent seven are dominant. (Source: TSX.com, yahoo.ca/finance

October 2024 Quarterly Update

Why Growth is Important

We manage your investments for growth because we think it’s important to be able to afford things in the future. It is one thing to increase the value your investments, it is another thing altogether to grow your investments in a world where prices are rising at a faster rate than our investments. Take, for example, the price of groceries.

StatsCan reports that the price of groceries has risen by 27% over the past five years. I was interested to note that the value of 1-year GICs invested over the same timeframe would have grown by 15% (pre-tax). The following chart shows that the price of a $100 bag of groceries has risen to $126.70 and the value of a $100 GIC re-invested each year has grown to $115.31.

We wondered what rate of return would have been required in order to still be able to purchase the same groceries today that we did back in 2019. An investment made on September 1, 2019 to August 31, 2024 would have had to grow at a pre-tax annual compound rate of 6.7% (assuming a 30% tax rate). Growing capital at this rate is not an easy task – and it is impossible without assuming some volatility risk along the way.

Housing Market Update

On September 27, 2024 I recorded a conversation with Christian Chiera at the Royal Bank of Canada concerning the housing market. I encourage you to check out his observations.

Click here to view the presentation.

Housing Market Update, recorded on September 27th, 2024. This has been provided by RBC Global Asset Management Inc. (RBC GAM) and is for informational purposes, as of the date noted only. It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. RBC GAM takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Past performance is no guarantee of future results. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. You should consult with your advisor before taking any action based upon the information discussed. All opinions constitute our judgment as of the dates indicated, are subject to change without notice and are provided in good faith without legal responsibility. Information obtained from third parties is believed to be reliable but RBC GAM and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered.

Value vs Growth Investing

I will close with a comment on an old theme: Value versus Growth investing.

Value investing refers to an investor who purchases a business to benefit from the profits that business is generating today and in the near future. An example of a value investment would be Bell Canada (BCE) which pays out annual dividends of over 8% to investors. Someone investing in BCE might be focusing more on how they can be paid today for their investment versus how they might be paid in the future. BCE contrasts with a growth investment such as NVIDIA, a maker of computer chips. NVIDIA pays very little dividends and is valued very highly in the marketplace. An NVIDIA investor is likely paying more attention to the profits they expect to earn in the future and is willing to forego profits and dividends today.

It is no secret that the increase of the share prices of growth businesses has been far better than the increase in share price of value businesses over the past few years. Looking forward, we continue to be careful – not chasing investments in growth businesses because of that increase. We believe that a healthy allocation to value businesses in addition to growth will serve us well in the years to come.

April 2024 Quarterly Investment Update

Inflation

Canada’s inflation rate recently dipped back below 3%, moving within the Bank of Canada’s targeted long-term rate band of 1%-3%. Despite this encouraging development, the persistent reminder of escalating prices remains undeniable. A glance at the Bank of Canada Inflation Calculator reaffirms this reality. Today, my calculation revealed that an item priced at $100 in February 2019 would have surged to over $118 by February 2024. That’s a significant increase.

Sometimes on Saturday mornings, I indulge in a visit to our local Tim Hortons – treating myself to a breakfast sandwich, a chocolate chip muffin, and a tea. However, with the recent opening of Elmira’s first Starbucks, I decided to splurge and try their offerings instead. To my surprise, the same three items: an egg sandwich, tea, and a chocolate croissant, set me back $19.68 (including the $2 tip I was prompted to give). While the breakfast was enjoyable, the dent it made in my wallet lingers and I think I will head back to Tim Hortons in the meantime.

I’m thankful that I don’t need to eat at Starbucks to survive. However, in many other respects, evading the relentless impact of inflation proves challenging. That’s why we are pursuing growth in our investments, aiming to mitigate the effects of inflation on our lives. With that goal in mind, I share our investment and economic insights below.

Valuations Up

In the first quarter of 2024, valuations soared as investors anticipated forthcoming interest rate reductions. Warren Buffet’s timeless advice to “be fearful when others are greedy and greedy only when others are fearful” is particularly pertinent in such times. I don’t observe much greed – yet. This is a good thing. We are well-served to understand prevailing themes in the stock market as we journey on.

The first theme is the difference in valuation between mega-cap and all other businesses. Consider, for instance, the valuation of NVIDIA, a leading producer of chips for Artificial Intelligence applications. With a market capitalization (i.e. what it costs to buy the company) nearing $2 trillion and annual cash generation of $19 billion, NVIDIA yields less than 1%. On the other hand, investing in the 23 largest US energy companies, with a combined market cap of $1.645 trillion, yields close to $241 billion or 15% annually.

(Source: Lykeion)

Small Cap vs Large Cap Stocks

Second, the growth in value of Small-cap stocks, valued at $2-3 billion on average, has trailed behind large (S&P 500) stocks, we believe there is significant opportunity in these smaller-cap stocks. It is easy to be in love with the S&P 500 based on its recent performance. We need to also exercise caution and understand the associated risks.

(Source: Financial Times)

Canadian Productivity

Last, the chart below shows that Canada’s productivity is lagging that of the US (Source: National Bank Financial). This is important because economic productivity enables us to financially protect what is ours. Our inability to grow our productivity puts us further behind and less able to pay for the things that matter to us collectively such as public health care, education and welfare. In short, because of these productivity gaps, our American neighbors have more resources available to pay for things, regardless of our political or ideological differences.

It’s crucial to note that a significant portion of your mutual fund investments are allocated to businesses located outside Canada, with a notable emphasis on the United States. The US economy has demonstrated remarkable productivity, resulting in increased profits and returns for business stakeholders. As investors, we reap the benefits of this heightened productivity.

Team News

In team news, earlier this month we bid farewell to Garrett Boekestyn who is pursuing an opportunity elsewhere. We will miss his good cheer and financial skills as we wish him all the best in his future endeavours. We also welcomed Christine Tullio to our team. She will be helping us out through to the end of tax season. Please be sure to welcome her as you call or stop by.