Three Headlines, One Perspective: Staying Focused Amid the Noise

We hope summer treated you well and that the return to routine has been a smooth one. This week has seemed like a more difficult week than normal to follow our mantra, "tune out the noise." As you know, most headlines are naturally sensationalized and have no actionable information to enhance your portfolio or the wealth plan guiding it. However, since there are three larger stories running at once, we would like to set out how we think about them rather than leave you wondering.

The first is trade. Canada's counter-tariffs took effect Tuesday morning, covering roughly $27.6 billion of American goods across more than seven hundred product lines, and matching dollar for dollar the fifty per cent tariffs the United States applied to Canadian products on August 22. Talks broke down in late August and, as of this writing, none are scheduled.

The second is energy. Oil pushed above $108 a barrel yesterday, its highest close since May, as the conflict between the United States and Iran stretches into a seventh month and continues to disrupt the flow of crude through the Strait of Hormuz.

The third is interest rates, and the two stories above are what is driving it. American inflation came in this morning at 3.4 per cent, firmer than hoped, and markets now put the odds of a U.S. interest rate increase next week at 90%, with a second one expected before year end. Closer to home, the Bank of Canada held their interest rate at 2.25 per cent on September 2 but explicitly flagged that the risks to inflation have shifted upward. Its next decision comes October 28th. Both the U.S. Central Bank and Bank of Canada raise interest rates as a tool to combat rising inflation.

So that is the current landscape, and we appreciate that some of it may be unsettling. What follows is not a prediction about how any of it resolves, because we do not build portfolios around forecasts or short-term events. We cannot predict the future, nor can anyone else. We would be doing you a disservice by suggesting we know where oil or the trade file lands six months from now. What we can offer is some perspective on what it has actually meant for your wealth.

Consider that the Middle East conflict and the trade dispute have both been running all year. They were in the news in the spring, they were in my mid-year letter, and they are on the front page today. Year to date, North American stock markets are up over 10% even after this week's four-day pullback, and the main international markets are close to that number too. More to the point, the single best performing sector in the market this year has been energy, which is to say the very thing generating the anxiety is also the thing quietly doing a great deal of the heavy lifting in your portfolio. You have built in exposure to energy stocks! Not because we predicted a war, but because we own everything. Overall, your portfolio has done very well again this year despite all the noise.

On our side, we are not repositioning. Your bonds naturally skew towards shorter term by design, which is precisely where you want to be in an environment where the next move in interest rates is more likely up than down. It means maturing bonds get reinvested at better rates rather than absorbed as a capital loss, and it is the reason a bond portfolio built this way behaves very differently from the long-term bonds that had such a difficult time in 2022. Your stock exposure spans thousands of companies across dozens of countries. You own the energy producers profiting from expensive crude and the businesses absorbing that cost, the exporters caught by the tariffs and the domestic firms picking up the work they lose. The headlines surrounding tariffs are likely more dramatic than their probable impact on long-term wealth creation.

If you would like to talk any of it through, please do not hesitate to reach out to either of us at anytime.

Take good care,