Liberation Day in the U.S. has not been that liberating for global stock markets. While uncertainty appears to be at maximum levels, we’ll focus on what we know at this time keeping in mind that this is an extremely fluid situation with trade policy and tariff announcements being tweaked daily.
We want to remind our clients that corrections are normal, bear markets are normal, and we’re currently experiencing the 39th double-digit drawdown in the S&P 500 Index since 1950. Figure 1 shows every single double-digit S&P 500 drawdown since 1950, and it also importantly shows the number of days in correction territory. Some are short and swift like COVID at 33 days and some are longer, like in 2022 at 282 days. An observation I had was that 2022 wasn’t that long ago, yet most of us have forgotten that the U.S. market dropped 25.4% from peak to trough. Perhaps it was easily forgotten and didn’t feel as painful because the drawdown was more orderly – taking the time to drop over almost a whole year – and wasn’t accompanied by a short-term shock.
Figure 1: Every S&P 500 double-digit drawdown since 1950
Source: YCharts, My Calculations
My own experience
Some investors may be thinking, “I don’t feel good with all this commotion. Why don’t we just sell and step aside? We’ll come back into the market when the dust settles”. I can understand how selling is pretty easy in these circumstances. The most difficult thing to execute well – and it’s near impossible – is the right time to get back in. The biggest recovery days happen when the fundamentals and sentiment is still very negative. Figure 2 shows that over the last 10 years, if an investor missed the five best days out of each year, your annual return would drop from 11.1% per year to -3.2%. This is dramatic and speaks to how impossible market timing is and how it can severely impact long-term wealth creation.
Figure 2: Missing Best and Worst Days Can Have a Significant Performance Impact
Based on daily prices starting in 2015 through 2024. Source: BMO Investment Strategy Group, FactSet
I have been in the industry for 15 of the last 39 downturns. While they are never fun, I can say emphatically that when I look back at all of them, the best strategy was to stay invested, stay committed to your investment plan, and, if possible, buy high quality businesses that are on sale. After the dust settles (~1-2 years after the correction), I never once found myself saying, “Kevin, you idiot! You bought too much equities, what were you thinking?!” If anything, in all cases, I wish I had invested MORE during market volatility!
The challenge for all of us is that the reward of long-term wealth creation comes with the discomfort of managing our emotions and behaviours through market downturns, especially those with extreme levels of uncertain economic circumstances. Markets don’t handle uncertainty very well, and in today’s world of algorithms, program trading, and hedge funds, many traders SELL now and ask questions later, which further enhances excessive levels of daily volatility.
Looking deeper underneath this correction
I think it’s fair to say tariffs are here to stay. What ultimate form they take and what negotiations transpire over the next days, weeks, and months is unknown. Canada and Mexico faired pretty well in last week’s reciprocal tariff announcements as both countries will not be subject to either the baseline 10% tariff or any reciprocal tariff rates. However, both countries still face stiff tariffs of 25% on vehicles, steel, and aluminum. China, the rest of Asia, and Europe were all hit hard. When you sum up all the tariff abbreviations globally, the general direction is weaker economic growth, weaker corporate earnings, and higher prices. There will be countries and sectors that are impacted less than others, and that’s the job and focus of the research team as they work through the impacts on our various portfolio holdings.
Will Canada and the U.S. experience a recession in 2025 given current trade events? Probabilities lean that way, but it is by no means a given. It is important to keep in mind there are different kinds of recessions. Some are deep with bubble characteristics, some are induced by rising interest rates, and some are mild and are a type of temporary growth scare. Figure 3 shows how recession probabilities have risen in the U.S. this year from around 18% to 47%. Given how global economies and supply chains have become increasingly interconnected, a global trade war, like we are experiencing, impacts all major economies. This is why we’re seeing the global major stock markets trade down together in the short-term.
Figure 3: U.S. Recession Probability in 2025
Source: National Bank Investments
What is interesting is the future market direction after a 10% market correction. Figure 4 averages every S&P 500 10% correction since 1990 and where the index ends up one year later. When a recession is avoided, markets on average are always higher one year later. When there is a recession, markets are flat to -5% one year out. Lastly, when we enter a deeper bear market, the S&P 500 is still down 5%-10% one year out. Remember, one year is an extremely short investment time horizon as we counsel our clients to invest in equities with a minimum 5-year investment horizon. Since 1926, the S&P 500 has been positive 88% of the time on a 5-year basis.Figure 4: Average pattern of S&P 500 12 months after a 10% correction
Source: National Bank Investments
What we’re focused on
While our investment process is not based on making macro calls, we need to be mindful of the current environment as it impacts the micro business fundamentals of the companies we hold in our portfolios. Here are some key potential catalysts and future events that we’ll be monitoring closely:
- International Exposure. We have always been strong advocates for International exposure. Most of our clients have between 15%-30% of their total portfolio in International equities. While this exposure didn’t add much to overall portfolio returns the last five years, we may be at an inflection point with recent global trade events where International exposure may add significant diversification benefits and outperformance vs the U.S. The U.S. still has some of the best high-quality companies in the world with superior earning growth, however, this is a trend we will be watching closely moving forward. Figure 5 shows the dominance of U.S. equity performance and U.S. earnings growth vs Developed Europe. Another observation is both the Euro and Canadian Dollar have strengthened since the tariff announcements, which is not usually the case when there is a global market sell-off. In our view, now is not the time to be underweight International equities, and the Canadian Dollar may be the surprise outperformer in 2025.
Figure 5: S&P 500 vs MSCI Developed Markets Europe: Relative Price & Forward Earnings Per Share (EPS) Momentum
Source: Scotiabank GBM Portfolio Strategy, Bloomberg, LSEG - Global Central Banks Reactions. We can expect weaker global GDP growth, however most of us have never experienced this type of tariff approach in our lifetime. What will be the true and lasting impacts on inflation and consumer prices? If global and U.S. GDP growth weakens, can we rely on the “Fed Put” (meaning the U.S. Fed will likely cut rates because they view tariff inflation as transitory) or will the Fed be slow to respond to U.S. economic weakness because they were burned after COVID, so their focus will be solely on keeping inflation contained?
- Management Teams. Most interesting is what we will hear from management teams in the quarterly conference calls – the 2025 first quarter earnings season start soon! It is possible some teams will withdraw guidance for 2025, and some teams may take the opportunity to lower expectations materially using the trade war as cover. Our research team will be listening very intently when it comes to how corporations plan to protect their profit margins and how much of their tariff costs they plan to pass onto consumers.
- November 2026 U.S. Mid-term Elections. Mid-term elections will be here before we know it. Will the Trump team have the resolve to stay with this aggressive approach on tariffs, the restructuring of global supply chains, and the risk of putting the U.S. into a stagflation (negative economic growth and increasing inflation) environment?
You can no doubt get a sense of how uncertain and unknowable future macro outcomes are, hence why global stock markets are so unsettled. Our investment process and philosophy focuses on what we can control and is the guiding force we heavily lean on when we encounter these types of market events. We can control our investment behaviour and how we allocate our clients’ capital, and that’s about it.
So, that is exactly what we are doing. We’re keeping our clients invested, diversified, and focused on the longer term. I haven’t made any comments on bonds or alternatives, like Real Estate and Infrastructure, however it’s times like these that exposure to Bonds and Alternatives provide important diversification benefits and can act like a shock absorber in our clients’ portfolios.We stand ready to take advantage of fear and market volatility by adding to current positions, possibly buying new positions that are on our watch list and stewarding our clients’ capital so that we’re better positioned for above average future returns when markets settle and begin to recover. We’re here to offer you a steady hand through any and all market environments. On behalf of myself and the entire CWB Wealth Partners team, we truly appreciate your support, patience, and trust in what we do for you and your family. We’re always available for any questions or feedback you may have.
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