Hello and welcome to the Download. I'm your host, Dave Richardson. And it is a postponed tariffs Stu’s days that we're having here. A lot of noise in the market yesterday. And let's not take it lightly as we'll talk about it here. Tariffs do have serious impacts on economies and thus business owners. And if you work for a company that's impacted by tariffs, there's a serious nature to them. But as we talked about with Eric Lascelles on Friday, and as I'm sure we'll get into with Stu right now, whether these tariffs are about an economic strategy or about a negotiation strategy is a primary factor in terms of how we want to interpret them and how we even want to think about them in relation to the way things affect your investments or, again, even companies in Canada and small business owners, etc. And, Stu, did I say anything there that you would disagree with, or you would want to fix a little bit?

No, that's pretty bang on, Dave. And it's been fast and furious with the news flow. It almost feels like when we were kids and there was no ability to press pause on the television and you had to run to the bathroom, you'd come back and say, what did I miss? Because the level of commentary is definitely moving at speed. There's always some discussion as to how braced markets are for these types of events, and it's always easy to look at hindsight and say that they had it correct or not. So if we had tariffs and we had a decline in markets, then we would say they weren't braced. And if we had them and they didn't go down, then we'd say we were braced. So it's a very good environment for scenario analysis to try and figure out what is and isn't priced in the markets. And we've seen volatility, but we've seen a bit of a settling as well. So we can talk through how we might approach this.

Yeah. For the sake of this podcast and our listeners, we're renaming scenarios, Stunarios, because we know how much you love scenario analysis, so we might as well just call it Stunario analysis, and that'll be a better way for people to think about it and remember it because those scenarios and really all the different scenarios and then the likelihood that they could happen and then what the impact is as each of those scenarios play out is really the essence of how you manage this from an investment perspective.

When you do a scenario or a Stunario, as you like to call it, there's two components to it, right? There's the potential for an earning change and then the potential for a valuation change at the same time. And coming into this year, market valuations were somewhat elevated relative to history, and we've talked through that. And when you have higher valuations, it just means you have less room for error. The tariff discussion has been ongoing, but in the last week we've also had DeepSeek. And so we've had a couple of issues thrown at the market in a short period of time that it's actually digested maybe better than you would have thought. And you have these two components. So on tariffs, you have what's the economic impact? So you take some view of what might happen to the economy. And then you roll that through earnings and you go through sector by sector, and you have discussions with companies about how much revenue might go here, might go there. Can it be repurposed? About a month ago, just our discussions with one company about how you'd say, well, this is negative, but then they can repurpose that revenue to other places. So there's a lot of moving parts to it all. And the benefit of scenario analysis in this environment is a good reminder that management adapts. So all the certain things come up and they adapt. So the Canadian stock market, even though Canada was going to respond with tit-for-tat tariffs, just because of the relative sizes of the economy, similar dollar amounts are going to have a bigger impact on Canada than they're going to have on the United States. And the first reaction that we got yesterday morning gave you a sense of what would be some things that people would worry about. So a slowing economy, potentially higher unemployment. And you could see that ripple through different areas of the markets, even things that are maybe a little bit more traditionally defensive, still start the day lower because of that unemployment worry. And that would speak to the volume of purchases that might take place. So you have that concern right off the bat. Then what would be the counter to that? Maybe the Bank of Canada would lower interest rates at the next meeting. Maybe there would be some fiscal response like there was during the pandemic to smooth the transition, and you have to negotiate your way through that. So on the Canadian side, one interesting thing, I suppose, is in the Canadian stock market, because there is US dollar revenue, there is global revenue, it may be not quite as exposed to the Canadian economy as the Canadian economy itself is, if that makes sense. So the primary area that you would go look at is the Canadian banks because their loan books have this exposure to the Canadian economy. The banks give you these pathways. They do scenario analysis. They don't call it Stunario analysis in their annual report. And they might call it the Stu annual report starting next year as well. But in the back of the annual report, they give you these pathways of things that they consider about economic growth and unemployment. And you've had Eric on to talk about some of the negative potential scenario from the economy standpoint, which fits within what many of the banks have in their annual report, and you can get some estimate. So the first thing they have to do is when it comes to provisions for credit, you have to make an assumption about the future. So if you change your forward economic forecast, you're going to have to put more provisions for credit up right off the bat. The banks are all very well capitalized and have good earnings. So this is an issue that they can readily deal with. That would be maybe considered a little bit more one time in nature because it would be a large reserve that they would then chew through as that actual economy unfolded. And then you would have to go and say, what does this mean for loan growth and all sorts of things for the banks going forward? It's certainly not a positive earnings. It's going to be a negative to some degree. You do it for the banks, you run through all the different companies that might be under the care. Valuations, we haven't seen the same expansion in valuations in Canada. But quite often, if you get a modest change to earnings, you also get a modest change to valuation at the same time during that digestion period. And those are the things that we've been working through for months, really. But that analysis was ongoing. And then for the US stock market, where you don't have the same type of earnings hits, you're really trying to figure out what does this mean from a valuation standpoint. And there you have the reverse of Canada, where maybe you have less earnings hit, but maybe valuations are a little bit more vulnerable. And, tariffs are not great for confidence, they're not great for things that go into valuation. So you need to work through that. But at the end of the day, not that you would plan or hope for these types of environments—I would never say something like that—but in the context of a longer-term investment plan, like when we deal with the potential for recession, the potential for adverse outcomes, portfolios are more than prepared for this. In something like a balanced fund, you start off with a rally in bonds because even though tariffs might be inflationary for a period of time, they're unlikely to be permanently inflationary. And then they might come with a slowdown in the economy on the other side. So you get the teeter totter effect in your portfolio of fixed income rallying. And there's always things to think about how we would move between one and the other. And then there's cash in the funds, of course. And when you get dislocation, sometimes you want to put that cash to work. So early yesterday morning when it was a more dramatic selloff, maybe you're in there trying to put some money to work, and then it rallies back, and you might ease off and go back to your analysis. So it's a very fluid process. I would say it's very measured. I'm not in my office today, but I've got to keep calm and carry on with the wall. It's very much that type of an environment.

Yeah, and we've talked a lot about this over time. One of the things we want to accomplish with this podcast and having you on every week is the idea that professional investors tend to manage through this upset or shock or whatever you want to refer to it as much differently than an average investor. Some of it comes just with experience, some of it comes with the background in education and training that you've spent, in your case, your entire life learning and leading towards this and then 30 years doing it. So you react. You have a different level of experience when you go through something like this. But it's just that emotional calm and the difference between leaning on my emotions, fear or exuberance to make a decision versus, okay, what are the facts? What's going on? Clinical. Here's where the opportunity is. Here's where I need to take action to manage risk to the downside. And that really separates great investors from people who are hit and miss and don't have the same level of success investing.

Yeah. And I think I would add to that: patience. It's a long game. And even if we had some cash in the funds, it's not like you're rushing to put all of it to work. There's an ebb and flow to all these all these environments. And we want to be prepared for just about anything.

I want to go back because you talked about the scenarios right at the opening. But I just wanted to come back and drill down a little bit deeper on a couple of the points you made. The first one and why I think it's important. And this was with respect to market reaction and the way the markets reacted in the face of this tariff threat and whether markets are prepared or not. Why I say this is important, and I want to relate it to investor behavior as well, is the idea that we have a president. We went through four years of a Trump presidency before. This is not a brand-new president where we're learning about a style or approach to the way they govern. We have an established track record. There's people who like Trump, and there's people who don't like Trump, but I think everyone would agree there is a certain frenetic nature and a bombastic and communicative way of dealing with the public and it creates a lot of noise out in the system where people have to react to that, whether it's investors, whether it's the market, whether it's you as a professional investor. When I looked at the reaction yesterday, and I was up most of the night watching the Asian markets, then watching European markets open, and having a reaction to these tariffs. We could see the futures. You can track futures on a number of sites that give you an indication of how the market is reacting to, in this case, something happening over the weekend and something that could be quite dramatic and have a long-term effect. And you saw a pretty big negative reaction. Asian markets were down over 3% at one point through the evening, and the forecast opened, particularly in some sectors, was almost as much as 3% in the Nasdaq, 2% in some of the more traditional companies. So it didn't seem to me as I was watching that, that the markets were really prepared for this announcement?

Yeah. No, it's a good point. I don't think the market is entirely prepared for a full allotment of tariffs everywhere. It started Friday afternoon when the list of categories and countries that were going to be included in this expanded. And you mentioned frenetic. I think it's also we try and think through what are his goals for the country. He definitely is about growth. He's got some different recipes than maybe aren’t traditional. There's a notion of wanting to have lower taxes, and those need to be paid for. And there's a notion that tariffs can help participate paying for that. If I put a national sales tax on, I could pay for a lower corporate and personal income tax, that would go 100% to the American consumer. If I put a tariff on, a portion is going to go to the American consumer, a portion might be eaten by the American corporation who delivers the good and service, and a portion might be eaten by the country that provides some of the inputs to that. So it's really how you slice and dice the pie that wants to pay for some of the other things that he thinks will be quite stimulative to the economy. So trying to think through that is important. I think the overarching thing is in the case of absent tariffs, the environment has been pretty good. So that's led to some elevated valuation. And any time you get a bit of a hiccup when valuation is elevated, you're going to get a bigger short-term change in markets. And I think that's one of the things that we also have to be aware of as this progresses.

Yeah. And we've talked about that a lot on this podcast and with other guests. And when I'm out doing presentations for investors, I talk about that as well. When you have a more expensive market, your return expectations are somewhat lower going forward and your expectations for volatility are higher. So you get those returns with a lot more up and down, and certainly coming into this year where parts of the market have been valued in the US, we point at. You run the risk of that, and we'll finish up with some ways to mitigate that risk and that higher volatility before we end the podcast. So don't worry, Stu, on that. I think where I was on the market reaction was Eric and I did a podcast on Friday, and again, you can listen to it, and that's more economic analysis of tariffs. So for the listeners, and please, if you're missing episodes, the easiest thing to do is subscribe to the podcast wherever you get your podcast or subscribe on YouTube. We're posting a lot of these in video form now, so you can see our strained expressions when we're getting stressed and emotional about the market. We're not. We always look the same. And Eric and I we maybe got a little bit ahead, but we were saying, look, we expect this negotiating tactics. So we ultimately think this is going to be resolved. It didn't get fully resolved. It's been delayed. And then the markets reacted to that. But the market reaction seemed to take this very seriously. And I was surprised by that because, again, there's a track record there. But I guess that goes to your whole thing around political goals. He clearly loves tariffs as a strategy. But whether it's solely for negotiating purposes or whether there is an actual economic explanation, and you gave that around the taxes and tax cuts and revenue gain that you would get out of tariffs. I guess that's one of the things, as you say, the markets have to figure out. If you can say, hey, there's a rational reason for it, I do have to react a little bit. And then because of valuations, like you say, you get that reaction, and then you get the push off and things ease back and carry on.

I think that's right. Rather than trying to decide exactly what the motivation is, I think we just try and wrap a bow around each one of the motivations. So there's a fentanyl-migrant motivation. There's the 51st State discussion and the Greenland discussion, etc. Maybe there's a longer-term notion around some needs for the United States. And Canada needs to be thinking about that, and other countries need to be thinking about that, maybe our ability to provide them under the right type of scenario. And then there's this, how am I going to pay for some more of my income tax or some of the tax cuts that I want to perpetuate or even accelerate? There are scenarios for each one of those things. Not that the drug issue seems solvable, but they do seem on the list. Putting resources to that is going to have an impact. If extenuating tax cuts are the major issue, in Canada, we don't have resources for that. There are certain things we can solve and there are certain things we can't in the context of those negotiations.

The other thing that was really interesting in your comments earlier, and that I heard from a couple of other portfolio managers that I really have a lot of respect for is the impact of management through this. Once again, hopefully a management team that is also obsessing about the different scenarios that could come out of this and the impact it has on their company and the way that a good management team is able to navigate almost anything that comes at them. I know that's a big part of what you do in terms of your evaluation of companies. We're two weeks into four years of this style of management from the executive in the US, the President, is that something you think you might lean on a little bit more in terms of some of your evaluations of companies?

Yeah, I don't know if it'll be more, but 100% it's important. Like open-mindedness. Flexibility. There can't be, well, we've always done it this way, so this is the way we do it. That type of attitude isn't going to really work in this environment. And you can just tell when you have discussions with companies. The companies that say this is the impact and here's the list of things we would do to mitigate it, and we're still brainstorming, that's a great answer. Other companies are like, here's the impact, we'll get back to you on the list. That's not as good an answer. And unfortunately, we haven't really run across too many companies that aren't thinking in those terms, which is a positive. I think the other thing, too, when we think about broader portfolios is maybe for Canadians in particular, you have US stocks, which haven't been as bothered. You have Canadian stocks, which some of them could go through a modest adjustment. Then you have the currency. And should I hedge the currency, not hedge the currency, own US stocks? The currency is a bit of a relief belt. I would say that the biggest surprise to us on Monday morning, if everything that was being discussed was true, I think the Canadian dollar would have been weaker right at the get-go. Not dramatically more so, but I think at its worst, it was only really down 1%. And that gives you a little bit of feeling that people had really bet against the Canadian dollar. So there wasn't an ability to come in and press that. And here we are just a day later. And I think the Canadian dollar is now back to where it was Thursday at lunch or something like that. So there's a number of variables to play with that we're always thinking about inside portfolios.

Yeah. And as we talked about a couple of weeks ago, or I guess maybe I think it was maybe three weeks ago on the podcast, about how certain areas of the market are expensive. In the US, certain areas of the market have high expectations. There's a lot of momentum behind them. There's a lot of animal spirits positivity around what's going on there. When we look at Canada, it is exactly the opposite. It's almost like news can't get a whole lot worse so that whenever you get a relief in some of those negative pressures, there's an opportunity for better outcomes looking forward. And the Canadian dollar would certainly be beaten down out as much as you're going to see it. And the relative expectations of the Canadian economy to the US economy, I'm not sure I can remember a period where things looked or were projected to be so different between those two economies.

Yeah, I think that's fair. I think the Canadian stock market itself hasn't been that bad, notwithstanding all the concerns and frustration about the economy and the reliance on housing and what have you, which is just another good reminder which was what we started with is that the Canadian stock market is not quite the reflection of the Canadian economy that maybe it used to be. I think we have to really focus on the domestic focused areas of the market and how they might be impacted. There's some big Canadian businesses that are listed in Canada that don't really have very much business in Canada.

So that gets to maybe the final point I wanted to get to today was just around the sectors. You mentioned, and this is what I was watching as well, a whole list of stocks in different sectors and how they were reacting early on in the day yesterday and then how they recovered. Is there anything you gleaned out of the way the market punished or rewarded companies that may benefit or be hurt by the tariffs? And then just in general, what sectors do you think are better positioned or in a worse position if this ultimately comes to pass?

Yeah. So I think right off the bat yesterday, the energy stocks did better than we thought, not only because it was going to be a 10% tariff instead of 25%. But when you think through the change in the Canadian dollar, not to say a 10% tariff across the board would be manageable, but with the dollar being down 6 or 7%, you're not far off dealing with a full tariff. I think the size of the tariff goes to the slowdown in the economy, and the slowdown in the economy would speak to whether or not we get any change in unemployment. So running a scenario on a bank stock, they have lots of capital. They have earnings to deal with this. Those scenarios had been done. They were pretty straightforward. I wasn't surprised to necessarily see them weaken on the news, and maybe they would weaken further in the event of it. I think some of the more defensive areas that people might typically associate with defense, like grocers and things like this, we have to remember, yes, they're defensive, but if we get unemployment, it's going to affect volume in some areas of the market that you may not have thought about. Seeing some railway stocks go down, it wasn't really as much of a surprise. You have your list of stocks in each sector and you have a formula that you think would impact them. Then it's the ones that maybe people thought would behave differently that didn't. That's what you want to go away and think about after you see it.

That's what you and the team are digging into as you look back at yesterday.

Yeah, in the early days anyways, a retail REIT or an apartment REIT might have been off more than a grocer. And you sit there and say, well, first off, out of the income that I have, I'm going to pay my rent first. I might change what I buy. And then the grocer, whether or not their volumes go up or down, has to pay the rent bill to keep the store open. So there's dynamics within the marketplace where you're just like anyone would run through their personal budget, we're trying to say, well, what's the top spend and how certain is that and what have you?

Yeah. And then I positioned this on previous podcast. We've entered it with having a little bit of fun with it. And again, yesterday, great example of where dollar cost averaging can work for you. Because if you had your regular dollar cost averaging buy in place on Friday or yesterday, and you get the dip in the market based on the news, you come in, you buy, and then the tariffs are postponed and the market recovers, and you're right there buying cheap, and you're doing it because it was there and the purchase was already committed to. And so you don't wake up in the morning in a panic and change your mind. You have to follow through. And that's, as you say, the discipline and the patience and the rationale behind that dollar cost averaging in a volatile market environment because the markets are more expensive and a more volatile political and geopolitical market. This is why I know you're such a big proponent of that strategy.

Well, yeah, you could tell I'm not at work today with a bit of a cold. But if I go back to the wall, there's the old J. P. Morgan line when he's asked, what will stocks do? He says, they'll fluctuate, young man, they'll fluctuate. And we're in a period of time here where they're going to fluctuate maybe a little bit more than everyone wants. And dollar cost averaging is just a tremendous tool for that type of an environment.

Well, given how you're feeling, your voice didn't fluctuate too much on the podcast today. And thanks for always being a trooper and making sure we make Stu’s Day's happen. And I thought there was a whole ton of stuff there that's going to be helpful in terms of the way investors think about processing, not just this particular situation around tariffs, but what's likely going to be a pretty interesting few months and years to come around markets. And so you really have to start to think about how you're going to manage through that. And I think it starts with a financial plan. It starts with an investment strategy like dollar cost averaging, and it should finish with listening to Stu’s days after work on Tuesday nights.

Sounds good, Dave.

Okay, we lost him now, so we better stop. Thanks, Stu. We'll see you next week.

Bye-bye.