How North America’s stock markets hold up is hard to figure out when the news continues to be negative.  The three biggest threats are politics, consumer spending, and the potential for war in the Middle East.

Today, based on the average price-earnings ratio (P/E) dating back to 1954, all North American stock markets are in expensive territory. The Toronto stock market is the cheapest.  Based on its P/E, investors believe it will take roughly 3.7 years for profits to double, which is impossible under Trump's policies. Using the same metric, the DJIA is priced as if profits will double in 2.9 years, the S&P 500 in 2.7 years, and the NASDAQ in just two years.  This has never happened as far as we know.  The norm since 1954 has been roughly 4.8 years. Take this as a warning. 

The U.S. economy was already heading towards a recession under Biden.  Trump is now sealing the deal with his tariffs, like the ones on the EU beginning July 9^th.  He also told Apple, one of the most successful companies based out of the U.S., to make the iPhone at home to avoid a 25% tariff.  Depending on the model it could cost buyers up to $2000 extra to be built in America.  Trump does not understand consumers have a limited amount of discretionary income and paying any tariff will mean less spending elsewhere.   He must obviously forget that most consumers live cheque to cheque. 

Thanks to his policies, the U.S. is fast becoming a place to move your money out of.  We would not hold any U.S. dollars or invest in American stocks now. They are already over-valued  and the full effect of tariffs have not worked their way through the economy yet. The smart money is already starting to unload their U.S. dollars. This is evident with Asian stock markets doing well when the American’s are flat to down. Asia is not waiting for Trumps temper tantrums to subside and is arranging new trade treaties with dependable governments.  

PM Carney for now has luck on his side because Trump is creating so much trouble.  The world wants to invest in stable and safe countries.  If Carney plays his cards right and opens our energy sector and cuts the size of government, foreign capital flight from Canada will reverse itself. He will build confidence in Canada if he eliminates Bill-C69 which does not allow tankers off our West Coast.  Carney should also be signing up the six countries that want to buy our natural gas. We also need a federal budget today. Instead, we must wait until after the Liberals get  their much-needed summer holiday after working only half the year. 

We can see the Loonie rising to 75 cents U.S. by the new year.  If Trump continues with his stupidity, then we will see an 80 cent Loonie in over a year’s time. This will be good for Canada because a rising currency helps to kill inflation and keeps interest rates low: Both of which attract foreign investment and increase government tax revenue. Stay away from all American securities.  If you own lots of U.S. dollars convert them back into the Loonie.  If Carney does not turn net-zero we predict the Loonie will be worth 75 cents by year end. 

Unless Israel causes a larger war in the Middle East, we expect the world stock markets to be flat to slightly down during the summer months.  It is the fall months that we should be worried about because most of the useless tariffs will be in affect. Only large businesses with pricing power will navigate the storm while many small-to-medium businesses will be decimated.  

It takes years for an economy to unwind and it is better to get out early. To protect your savings, keep most of your funds in insured GICs, with a one-year term, depending on your age. If you are retired and do not have the money to speculate with, cash equivalents should be 60% of your investments, even if rates are low. It is important to remember that the largest gains occur when you wait for the market to come to you.  

We are not concerned about our holdings. Pipelines and oil companies will be volatile, but the good ones will continue to increase their dividend if oil remains the main ingredient in the 6500 goods the world cannot live without. If our recommendations get into financial trouble, it means the public has cut back on spending and all markets will be in trouble. However, companies that have the cash flow to support a dividend always has a floor under their share price.  Carney and the Bank of Canada can hopefully read the tea leaves and smooth out troubles that may occur.  If they do, Canada can become the winner.  

The world has avoided deflation for decades because of falling interest rates accommodate the increased lending needed to keep prices from falling. However, this debt hangover will lead to trouble.  While not a problem yet, banks are nervous about many of their used car loans being worth substantially less. The good news is that Canadian banks are probably safest in the world thanks to the Bank of Canada’s strict reserve requirements set three years ago. If the economy slows during the summer months an interest rate cut will occur in early fall.  Thereafter rates may begin a demand driven series of increases from governments, businesses, and consumers needing to borrow large sums of money to keep things going.  

There is too much speculation going on when Trump’s policies guarantee tough times are coming.  All markets eventually react to the real world and a correction is overdue.  We have no idea when, but they will, so prepare today for market turmoil.  We cannot stress enough, if you cannot afford to lose a big chunk of your savings then do not wait for the correction and begin protecting yourself today.  Like a bull market, bear markets also overshoot because people become scared and try to sell to protect what little is left of their savings. The chart says it all.  Stocks are overvalued and will correct further than people expect.

Chart: Shiller PE Ratio - Multpl