Juggling Dynamite

Participating in a recent VRIC panel with my two favourite economists was fun, and I have included the video clip below.

As the only money manager on the panel, I must add a caveat to David’s comments about the Canadian stock market being relatively cheaper than the U.S. That’s true, as I have noted many times, including most recently in Starting Points Matter most of all.

U.S. stock markets are trading at the highest valuations in the world and higher than 92% of all historical incidents on the insightful, cyclically adjusted price-to-earnings ratio “CAPE.” Canadian stocks have appreciated less, to be sure, but at 25x earnings, they rank second only to the U.S. globally and more than 69% of historical incidents.

Unfortunately, being less overvalued does not mean the Canadian stock market will be saved from a bear market. If that were true, life as a capital protector would be much easier. In reality, global stock markets are highly correlated.

Canadian stocks were less overvalued in the 2000 tech bubble, and Canada did not follow America into an official recession in 2001. Still, the TSX lost 50% (2000-2003) while the Nasdaq fell 80%. In 1980-1982, the TSX dropped 45%, 1990-1993 (24%), and 2008-2009 (50%). In the 2020 COVID meltdown, the more ‘fairly valued’ TSX fell 37% in 3 weeks as global markets crashed.

Apart from the highly irregular COVID plunge and 11-month bounce back, the shortest recovery time was four years to 1984 to recoup the 1980-82 losses. It took eight years to 1995 to recover from the 1987 market drop, even though no recession unfolded.

In the 2008 bear market, the TSX dropped back to the price level it had first reached eleven years earlier in 1998.

It took six years for the market to recoup its 2008 high by 2014, and it remained range-bound until December 2018, for a decade of flat pricing. Even that proved fleeting; the TSX gave back twenty years of gains as it tumbled back to the 2000 cycle high in March 2020.

Amid unprecedented monetary and fiscal stimulus following 2008, including years of near-zero interest rates, it took twelve years for the price index of Canada’s most valued companies to hold above the 2008 cycle peak by May 2020.

Then, the 14% sell-off from March 2022 to last October returned the TSX to the same level as April 2021. At that point, the index had managed a 24% gain over more than 15 years and underperformed T-bills with much greater capital risk and psychological trauma.

Dividends help reduce total losses to the extent they continue to be paid. If a market drops 40% while paying a 3.2% dividend (like the TSX today), the total capital loss will be reduced to 36.8%, assuming no withdrawals or fees and all dividends are reinvested.

The table below (ala A. Gary Shilling) shows the cyclical decline in different sectors, including dividend-payers like staples, financials, health care and utilities, versus the S&P 500 over the past four recessions. #fuugly for holders, but this is how valuable investment opportunities present to those with cash and discipline.

Today on the channel, Jay is joined by Danielle Dimartino Booth, Danielle Park and David Rosenberg on stage at the VRIC 2025. The conversation covers key economic and market themes, including the impact of Donald Trump’s second-term policies, potential tariffs on Canada, inflationary risks, the Federal Reserve’s monetary response, and the current state of the stock market. The panelists provide expert insights on market overvaluation, interest rates, and global economic trends, offering a mix of cautious skepticism and strategic investment considerations. Here is a direct video link.

According to the latest Canadian Association of Insolvency and Restructuring Professionals, 2024 saw a 15-year high in Canadian business and consumer insolvencies—about 375 daily. The group expects pressure on companies and consumers to continue in 2025 amid threats from potential tariffs and mortgage renewals. See, Insolvencies in Canada rose 12.1% in 2024, led by business filings:

The Bank of Canada has lowered its benchmark interest rate to three per cent, down from a high of five per cent, as the economy has weakened.

However, homeowners renewing mortgages in 2025 are likely still facing higher monthly payments than when they last locked in a rate, and prices on many everyday necessities are still more expensive than they were a few years ago.

Businesses are also under pressure.

Of the 1.2 million Canadian mortgages that renew in 2025, around 85% were contracted when the Bank of Canada’s overnight rate was at or below 1% compared with 3% now.  Those with fixed rate terms have not yet had to confront the payment leap compared with pandemic-era interest rates (dark blue bars below, courtesy of Toronto Star):

While Canadian mortgage rates have decreased from more than 6% in late 2024 to around 4% today, payments on renewal are significantly higher than when rates were in the 2% range four and five years ago.

How long the Trump bump will continue in stock prices is everyone’s guess. Still, great expectations increase room for disappointment, and nothing matters more to long-term investment returns than the level of fundamental valuation at the starting point.

Donald Trump comes back to office astride extreme confidence and the most highly valued stock market of all time, even more inflated than at President Hoover’s inauguration months before the Black Tuesday crash of 1929.

Today, the market capitalization of seven tech companies accounts for a record 32.4% of the widely benchmarked S&P 500 index (leaving the remaining 493 companies to comprise a record low 67% of the index (shown below since 1980 via Goldman Sachs and Global Markets Investor).

Hyped on A.I. mania, the S&P 500 is trading at 37x (CAPE) earnings expectations, compared with 28x at the start of Hoover and Trump’s first term and 8x when Reagan came to power in 1982. From present CAPE levels, the widely held large capitalization stocks are projected to average -5.2% annually over the next seven years after inflation (GMO data). Meanwhile, downside exposure is endemic with 70% of retirement savings concentrated in equities.

The total market value of U.S. stocks at $61.4 trillion is 209.3% of the last reported GDP ($29 trillion). On this measurement, famous as Warren Buffet’s preferred gauge of prospective equity returns, U.S. stocks are priced for an average annualized return of -0.4% over the next decade, assuming the current dividend yield of 1.16% is reinvested. In March 2000, just before tech stocks crashed by 80% and the broad market halved, U.S. stock prices peaked at 175% of US GDP.

By comparison, Canadian stock markets totalling $4.89 trillion in 2025, trade at 162% of Canadian GDP ($3.019 tn), and compared with 153% at the 2008 cycle peak. If dividends are fully reinvested, Canadian stocks are projected to return 4% annualized over the next decade. Any withdrawals or fees reduce dividend reinvestment and return prospects further.

No wonder, Buffet’s firm Berkshire Hathaway holds a record 30% of its capital ($325 billion) in cash today (shown below since 2004).

Trump’s proposed tax cuts can also be compared with the Reagan tax cuts of the early 1980s, which started from much higher tax rates (the top marginal rate was 70% in 1981 versus 37% today) and much lower government debt levels (30% of GDP in 1980 vs. 120%+ today), and policy interest rates that were above 18% (vs. 4.25% today). Unlike in 2025, in 1981, policymakers had luxurious space to ease financial conditions and lower tax rates in response to recessions, which they did in various ways for the next 40 years.

Today, demographics are also the inverse of the Reagan presidency, when 85% of the population growth was in the working-age population (25-64). Now, eighty percent of population growth is among seniors (65+), and similar trends are challenging most countries; this is not something governments can fix. Least of all, a government that has vowed to deport undocumented workers and reduce the flow of new immigrants.

The next 90 days promise to be eventful and offer further insight into how many moving parts may unfold. The most rewarding investment opportunities come while the masses are liquidating; that is yet to come.