Trump, Tariffs, and the Magnificent 7: 2024 Year in Review
Download MP3Welcome to a special bonus episode of the Our Family Office podcast. We recently published our year in review investment commentary, and we thought it would be a great opportunity to record an episode where we review it with our cofounder and chief investment officer, Neil Nisker. Neil, thanks for being here.
Neil:Thank you for having me, Adam.
Adam:So let's start with a broad question as we elaborate a little bit on the commentary that we've posted, and you could find it at ourfamilyoffice.ca. Neil, when you think about 2024 from an investment perspective, how do you frame it? Was it a a do you think about it as a good year, a bad year? Maybe it depends what your perspective is.
Neil:It's a very interesting question. For many investors, it was a very, very good year because the stock market was up over 25%, and I'm referring to the S and P 500.
Neil:Interest rates went down, but more warning bells were sounded in 2024, than in many recent years. For example, the market became very thin. More than 50% of the gains were from seven companies, and those are the big tech stocks. Artificial intelligence became the flavor of the month. There was more risk being taken. But to answer your question simply, it was a a good investment year. Other asset classes did well, and, and, so bottom line is it was a good year for investing.
Adam:And you allude in the investment commentary to your concern around, as you just mentioned, the how thin the market is and how dominant the magnificent seven tech companies have become. Elaborate a bit on what are your concerns around that concentration.
Neil:Concerns are that, let me take people back, to the what's called the nifty fifties, nineteen seventy ish. There were 50 companies, and many people have never heard of Kodak and Polaroid, Hewlett Packard. And so what happens is the market, when it gets very, very concentrated, becomes more risky. Many of the other 493 companies in the S and P 500 index in The US actually did not do well. So a lot of the stocks went down.
Neil:Their corporate earnings aren't growing. And so you have a very thin, market, and historically, that has not boded well for the future because you become very, very dependent on expectations of growth for the future. Again, the stock market is all based on expectations of future earnings and cash flows. Right now, multiples of price PEs, price earnings ratios are historically high. And as I say, there are many, warnings out there. There's more than 10 different things that we look at, which causes great concern for the future in the stock market, not other asset classes.
Adam:So taking sort of a devil's advocate perspective, if I looked at the magnificent seven and I said, well, you know, the the world is becoming more technologically focused, and, you know, those companies are gonna continue to grow. What's wrong with those companies representing an outsized portion of the stock market?
Neil:Yeah. It's a good it's a good question in that, again, these companies will continue to grow, but the market is paying a very, very high, price earnings ratio valuation for that anticipated growth. What if they don't grow by 50% a year? What if they grow by 40% a year? These stocks could be down twenty, thirty, 40 percent, and you don't wanna own them when it goes down 40% because then they have to be up 66% just to where, you know, you were a month earlier perhaps.
Neil:So it's all about valuations, expectations, view of the future because the past is already the past. You know, the performance of 2024 and 2023, which are excellent coming out of a bear market in 2022, now the question is what happens for 2025? And what we know is, that there are many things that could cause the market to go down dramatically, and we've certainly seen that in the last week.
Adam:Now you've touched on this a little bit, but, looking big picture at equity performance, long term performance of the S and P 500 is, you know, around 10%. You alluded to, in the investment commentary, Goldman Sachs predicting returns over the next ten years of closer to 3%. Explain why that is.
Neil:So let me back up a step and tell you, what Goldman Sachs and many other US institutions do, and I'm very happy to to say that we do this as well. And it's called having a capital market assumption for the future, not looking backwards, but looking forwards with a view of what each asset class will do. We thought we were conservative saying stocks in the next five years would give you about six and a half percent return. As you alluded to, they've given 9.3% return for the last hundred and twenty years, but in the last ten years have returned 13%. Now I'm not saying that, you know, we'll go back to long term averages or anything like that.
Neil:But when Goldman Sachs came out with a report where their expectations of equities for the next ten years was half what ours were, we said, well, that's crazy. We thought we were conservative. But there are people out there, people managing trillions of dollars who believe there'll be a major correction in the market, that the market will go sideways, okay, for a quite a long period of time, that they'll continue to be inflation, and that basically they're looking at, you know, 1% returns when you take into inflation, hopefully, getting down to 2%. So when I went through the study of Goldman Sachs and saw the data they were using and there you have thousands of thousands of data points saying, look, the market's expensive, it's thin, you know, all these metrics that they use. It's time to be cautious. Okay? It and and because of our business of being in the stay rich, not get rich, playing offense by playing defense, preserving even in the worst recessions or bear markets our family's wealth, our strategies of having 13 different asset classes, being slightly underweight in equities right now, waiting for a great buy opportunity, You know, these are reasons why, our portfolios are conservative. And yet last year, it was a great year. We were up double digit, so we're quite happy.
Adam:I wanna talk a little bit about interest rates, which are you know, it seems to be in headlines pretty consistently. Walk us through where are interest rates today? Why is it that investors are eager for rate cuts, and why aren't there many rate cuts being priced into the market in The US right now?
Neil:So The US economy let me start with The US. The US economy is much stronger than many people thought it would be. Now the Fed in United States, was behind the curve in that a lot of money was pumped into the system when we had the pandemic. When COVID 19 occurred, governments around the world didn't know, how to react, so they lowered interest rates to zero. Great time to take a long term mortgage out.
Neil:However, you have to pay the price for that stimulus. And we've always- not always- The last several years, we've said that interest rates will stay higher for longer. Because of the stimulus that was created in The United States and job creation now, they aren't in recession. Canada's different, and we've seen short term rates in Canada come down, twice as far as US rates.
Neil:Canada rates are down 2%, short term rates, US rates are down 1%. In Canada, because I would say we probably are in a recession, but listeners have to understand, the term recession is only used officially once you're six months into it. The definition is two quarters of negative growth of GDP. Having said that, the rates in Canada are going down for a reason, and anytime interest rates go down, historically, for the last hundred years, anytime interest rates go down, the stock market goes down. Well, the stock market hasn't gone down yet. Okay? And this is what people have to understand, another reason to be cautious. So back to interest rates, in Canada, because of trade wars, because of a number of things going on out there, because of our lack of governance, if you will, a potential election, lame duck prime minister, there are many reasons why short term racing will go down in Canada. United States is a different story. We continue to believe that, rates will stay higher longer.
Neil:As I said, they've lowered short term rates in The United States by one percentage point, but the ten years are up one, one percentage point. And this is something that's also an anomaly that doesn't happen often. So there's many reasons that one should be concerned in their equity portfolio.
Adam:So you've spoken a few times about the need for caution. One reason for caution is unpredictability and, of course, Donald Trump, his leadership has sort of defined unpredictability. So him being elected near the end of last year, taking power early in 2025, how does his unpredictable style affect your approach to building portfolios for our clients?
Neil:I'll be honest. You know, the Republicans may have some, wonderful policies. However, Donald Trump is a gunslinger. He doesn't share our values. The, report, investment commentary that was published last week, was titled a greater certainty of uncertainty.
Neil:So you have to prepare yourself for shocks, and that's what we've done in building what we call an all weather portfolio. We don't know the future. My greatest fear is of the unknown unknowns, not knowing that which we don't know. And even when you talk about the tariff wars and, again, published a piece, last week called when best friends fight the dumbest trade war in history. This is crazy.
Neil:So you have a megalomaniac. You have a narcissist. You have someone running the most powerful nation in the world, the largest economy in the world. China is second to that, and he's picking a fight with his best friends. Now you can pick a fight with one best friend, and hopefully, you'll make up soon after.
Neil:But for him to pick a fight globally, again, these are challenges we've never faced before. We've never had a president like this, his style. And, I'm, you know, I hate to use the word scared, but, you know, when you're managing, with discretion, although we don't use discretion, our clients' portfolios you know, let me just comment that our portfolios have half the risk of government bonds
Adam:From a volatility perspective.
Neil:From a volatility perspective. And , you know, I joke and say we serve very demanding clients. When the market's up, they expect to be up. And when the market's down, they expect to be up. So, you know, what we've done is, yes, we are concerned about the future. Yes, we would own less stocks than most people. I would say instead of a 60/40 portfolio that a lot of people have, which is 60% stocks and 40% bonds, Almost 70% of our investment assets are in anything but a stock and bond. And that is because just like any other sovereign wealth fund or or endowment fund or trillion dollar fund out there. We are in other asset classes that for much, much less risk will get you a better return than the stock market, especially in the foreseeable future.
Adam:And you mentioned the tariff piece that we published recently that, listeners can also find on our website at ourfamilyoffice.ca. And as of this recording, the tariffs between Canada and The US are on pause. By the time we publish, Who knows what the situation will be? It seems to be changing by the day. But in the context of the tariffs with The US, you spoke in the piece about it being a potential opportunity for Canada. Can you explain what you mean by that?
Neil:So most Canadians are wonderfully happy to be, Canadian, proud of their, unique heritage, and would never ever ever consider being the fifty first state. I posited to some people the idea of maybe United States should become our eleventh province or territory, with my tongue in my cheek. The bottom line is that Canada has to get their act together. Our taxes are too high. The deal that the Liberals made with the NDP, allowing a socialist party to, not only take on more debt, but control the destiny of most, tax paying Canadians.
Neil:It's expensive to live in Canada, and we aren't getting the bang for our buck of the taxes we pay. Charitable communities are under pressure. The you know, the subsistence level has has raised over the last number of years. So there are many, many homeless people. There are many, many people lined up for food banks. And I'm saying to myself, maybe there's a silver lining here. We have one of the greatest, natural resources, for a country. We have, oil and gas. We have mines and minerals. But we have the most precious commodity in the world, and that is the greatest fresh water supply.
Neil:And fifty years ago, I was part of a a think tank to look at selling water to The United States. Because when push comes to shove and, basically, this is water in James Bay, which is below Hudson Bay. When push comes to shove, The United States can just put a tap into the Great Lakes, take water out of Lake Erie at their whim. And what are we gonna do? Fight them with our armed forces?
Neil:So the bottom line is let's be smart about opportunities there. The other thing that really bothers me are the provincial trade barriers that Ontario and Quebec import water sorry, import oil and gas, sorry, from The United States. We get oil from the Mid East. We get oil from Nigeria. And it's because we don't have refineries in the East to take our western heavy crude, which is sent down to United States, probably mostly Texas, and sent back to Canada.
Neil:Or the auto pact where parts start in Canada, then go to United States, then go to Mexico, then come back to United States, then come back to Canada. Some end up in United States, some stay in Canada. It's dysfunctional. So we have to look at trade and global trade in the context of maybe there's an opportunity here. Maybe Trump is saying Canadians, I'll give you a chance to get your upper you know, your act together. And quite honestly, we need to get our act together.
Adam:Neil, thank you very much. It's always fascinating to hear your thoughts. Really appreciate you joining me today.
Neil:I appreciate the invitation. Thank you for having me, and I hope people get something out of this.
Adam:I hope you enjoyed today's special episode. Our family office is Canada's First purpose built shared family office, and the Our Family Office podcast is produced by Henry Shew. Please visit ourfamilyoffice.ca for more information about our firm, and don't forget to rate, review, and subscribe so you don't miss an episode. And, of course, share it with your family. See you next season.
Adam:The information in this podcast is presented as a general educational and informational resource only. While certain participants in this podcast may be registered to provide investment advice as a representative of our Family Office Inc, itself a registered firm in certain Canadian jurisdictions, this podcast does not provide individualized investment, financial planning, legal tax, or insurance advice, nor is it meant as a recommendation to any listener to buy or sell any specific securities or otherwise take any other investment action. Any action you may take as a result of the information presented in this podcast is your own responsibility. Our Family Office Inc and each of its representatives that participate in any podcast disclaim that any listener should rely in any way on any of this content as investment, tax, legal, or insurance advice. Listeners are encouraged to consult with their individual investment adviser and other financial professionals prior to taking any potential investment actions or making any insurance or tax decisions.
