TACO time

Winnipeg Free Press

07-06-2025

Opinion
The stock market says, 'Yes.' And the bond market says, 'No.'
This sums up much of the recent sentiment about the economy in the United States, and for that matter the global economy, amid the back-and-forth policies of U.S. President Donald Trump.
Stocks have largely recovered their losses this year, as investors believe the One Big Beautiful Bill Act — with its tax cuts largely focused on the wealthy — will power a surge in growth.
Michael Probst / The Associated Press files
The curve of the German stock index DAX is seen in the background as U.S. President Donald Trump is shown on a TV screen at the stock market in Frankfurt, Germany.
What's more, many investors ascribe to 'TACO', a term coined by a Financial Times columnist that stands for 'Trump always chickens out,' meaning most of the tariffs threats are bluster meant to make him appear to be a master deal-maker and they won't be here to stay.
'That is quite a diverging opinion from what the bond market is saying,' says Jonathan Baird, Toronto-based editor and publisher of the Global Investment Letter.
Bond investors view the One Big Beautiful Bill as a recipe for inflation, eventually adding more than US$3.8 trillion to the annual budget deficit.
Tariffs, too, are inflationary, which further make the case for more investors to sell their U.S. bonds.
Average investors, not Wall Street, are likely feeling indecisive and maybe even fearful.
A dose of caution is warranted, says John De Goey, portfolio manager with Design Wealth Management in Toronto, and author of Stand Up to the Financial Services Industry.
Even without Trump-induced mayhem, 'stocks are very expensive and therefore very risky.'
He points to the cyclically adjusted price-to-earnings — or CAPE — for the S&P 500.
CAPE helps determine if an investment — based on a 10-year average of inflation-adjusted earnings — is valued appropriately. Right now, the S&P 500 is highly overvalued, according to CAPE.
De Goey says the metric may not be a good predictor of bear markets.
'But it's extremely reliable for determining what the annualized return will be for the asset class … over the next decade,' he says. 'So when the S&P 500 is in the 30s or higher, the return over the next decade has historically been around zero.'
The CAPE for the world's largest stock index has been about 35 in recent weeks.
What's more, many seasoned investors see a decade ahead that could be similar to the 1970s when 'stagflation' weighed on markets. Characterized by higher than normal inflation and slow economic growth, stagflation can be toxic for stock and bond returns.
'I would suggest probably being as defensive as you're comfortable being,' says Baird, who expects stagflation to be a problem for the next few years.
He doesn't recommend moving all of the portfolio to cash to preserve capital. That is tricky to time correctly on getting out of the market and, even more so, getting back into the market.
Broadly, stagflation fighting strategies should focus less on growth stocks. Instead, consider companies selling goods and services consumers can't go without — like groceries and housing. Bonds should have shorter durations to reduce the impact of inflation. Commodity- and currency-based strategies can also provide some upside amid volatility.
As well, alternative investments — private equity and credit, private real estate and hedge funds — are increasingly used by portfolio managers.
'The low-hanging fruit is increasing alternatives exposure,' De Goey says, noting these assets are less correlated to stock and bond markets, providing portfolio stability.
Previously only available to wealthy investors, alternatives are now widely available as mutual funds and exchange-traded funds (ETFs).
That said, investors should still own stocks, including those in the U.S., but they should consider reducing exposure to overvalued companies like the so-called Magnificent Seven (including Amazon Inc., Tesla Inc., Apple Inc. and Meta Inc.), says Jai Gandhi, investment adviser with Endeavour Wealth Management, iA Private Wealth in Winnipeg.
'We're not cutting our weight to the U.S. market compared with a year ago, but we're conscious of the high values of companies that hold more risk.'
That said, owning good companies never goes out of style for long-term investors.
'We don't worry too much about short-term price movements,' says Hardev Bains, president and chief investment officer at Lionridge Capital Management in Winnipeg.
Rather, the focus for Bains and other fundamental investors is owning companies with long-term profitability growth, strong balance sheets (significantly more assets than liabilities) and competitive advantages.
These companies, however, are only purchased when their share price reflects fair value relative to those qualities. What's more, even holding great companies can be risky when they become steeply overvalued.
At that point, it's worthwhile selling those holdings or at least reducing their portion in the portfolio.
'Part of our discipline is if we sell companies and can't find anything to buy — which happens in periods of expensive markets — we go to cash, as we're doing right now,' Bains says
Companies may have great business models, but their share price today is generally too high to purchase with a margin of safety.
Still, Lionridge's equity portfolio obviously must hold stocks — currently about 20 companies that are likely to weather stagflation and even a recession better than other stocks.
A recession is likely already underway, De Goey notes, pointing to gross domestic product (GDP) in the first quarter contracting in the U.S.
'No reasonable person expects the economy to grow in Q2 given tariffs are now having more of an impact.'
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The best companies should remain profitable, and market drops will put their shares on sale from time to time, Baird says.
In the meantime, beware of FOMO — fear of missing out — when markets surge higher, he adds. That often leads to buying high and, worse, selling low in a knee-jerk reaction to markets plunging in fear.
'We're all fallible and prone to psychological traps,' Baird adds. 'So the biggest thing for any investor is managing our emotions.'
Joel Schlesinger is a Winnipeg-based freelance journalist
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