This too shall pass

I started in this industry just in time for Black Monday in 1987. 

I was living in London at the time and watched as the Dow Jones Industrial Average (DJIA) fell by a stunning 22.6%, from 2246.74 to 1738.74. I remember it was the first major correction of my career and the first time I ever saw an Englishman cry!

On April 4, 2025, the DJIA lost 2231.07 points, or 5.5%, to finish at 38314.86. Friday’s point drop represented nearly the entire value of the index back in 1987. The value of the index today is 22 times what it was on Black Monday, representing enormous investment growth over time, and despite the many corrections since.

I mentioned this because I wanted to give you some perspective on where things stand, given recent market volatility. 

Part of that perspective includes knowing that some of the world’s markets, specifically US markets (I’m looking at you, S&P500!), had become significantly overvalued by historical measures. A correction was likely as the market was out over it’s skis. 

A lot of the S&P500’s growth over the last number of years has come from the mega-cap tech giants, collectively known as the Magnificent 7. Apple, Meta(Facebook), Google, Microsoft, Amazon, Nvidia and Tesla.

Their stratospheric growth and (dis?)proportional representation within the index has revalued, some might say warped, the index itself. In 2014, the Magnificent 7 represented 9.8% of the index. Last year that number topped 34% of the index…in 7 companies. 

The Magnificent 7 & the S&P 500

The S&P 500 is the main benchmark for U.S. large cap stocks. It includes just over 500 major, publicly-traded firms.

Source:  Visual Capitalist magazine - Author Julia Wendling, December 11, 2024 

At some stage there would be a correction. We didn’t know when it would happen or what would trigger it, until recently.

The Tariffs

What triggered it was President Trump’s effort to ‘move fast & break things’, to quote tech leader, Mark Zuckerberg. 

The U.S. administration's new tariff framework risks undermining decades of globalism and appears to have altered the world economic order overnight as it ushers in a new era of U.S. protectionism. In a nutshell, the Trump administration believes globalization has caused the U.S. manufacturing sector to set up shop elsewhere, often in countries where what it considers subsidies or currency manipulation provide an unfair advantage. Tariffs on the scale of those introduced by the U.S are meant to reverse that trend.

To paraphrase the White House;

‘We’re being ripped off by our trading partners. We’re losing jobs because firms can make goods cheaper abroad. Often, they get government subsidies, or a currency is manipulated so they can undersell their US-based competition. So, we’re going to take some of your growth, through tariffs, and make it our growth. We’ll repatriate all those jobs, then give our people tax cuts and perhaps pay down some debt.’

However, it’s a view that’s rife with contradiction. It assumes no retaliatory tariffs will be levied. It ignores the fact that US unemployment is near all-time lows. We could discuss the quality of those jobs, but despite the labour market softening, people have jobs. It completely ignores the fact that under globalism, US GDP has been the strongest in the G7 for 25 years. 

The message is designed to portray the U.S. as economically hollowed out and on its knees, seeking to create a level playing field. In fact, critics say the world’s largest economy is using its economic might to extract what amounts to a trade tax from countries ill equipped to fight back on equal footing.

In the end, everyone loses. 

Disruption will be significant if the tariffs remain in place as implemented. Jobs will be lost in Canada, the U.S. & abroad, and the chances of a recession are now above 50%, according to JP Morgan.

World markets, especially those in the U.S. such as the aforementioned S&P500 and the tech-heavy NASDAQ, have been whipsawed as they try to grapple with a number of things;

• A re-pricing of stocks based on how much they’ll be affected by tariffs
• The general overvaluation of US equity markets
• The tariff-driven likelihood of a recession in the US & elsewhere

Elsewhere, Fed Chairman Jerome Powell has his own concerns. The tariffs will almost certainly cause inflation to increase once more. This would normally require a round of increased interest rates to sap demand and quell inflation. 

However, the same tariffs are also likely to cause a slowing economy as the consumer retreats in the face of higher prices, and rising unemployment. Under these conditions Chairman Powell would usually drop rates to stimulate demand and encourage growth.

Higher unemployment, higher inflation & lower growth are ingredients for stagflation. We’ve talked about here it before, and we’ll talk about it again. It may shape the economy and the investment landscape for years to come.

So, what to do?

As the old saying goes “If you can’t do anything, do nothing.” 

As difficult as it can be to watch some of the ground you thought you’d already gained be lost through the actions of the current US administration, our best move is to do nothing.

I remind my clients that we are invested in high quality, well diversified portfolios of stocks and bonds that are currently being re-priced, but they are investments of the highest quality and have withstood many a test over time.

Tariff policy has been changed, increased, decreased, rescinded and reintroduced based on a unusual mathematical formula and how the receiving nation responds. We would never make investment decisions using any of these datapoints.

Bargains will begin to appear as they always do during periods of volatility. Those of you with cash and the longer-term time horizon will be able to take advantage of some of these bargains. Some have already begun to raise their heads.

Companies and entire nations will reorganize their economies, including Canada. They will forge ever-stronger links with Europe & Asia, working & trading with the US where they can. We will survive and thrive once more. 

In order to give you even greater context for recent market events, I’ve attached an Andex chart. It shows us the markets since the 1950s. Despite all of the things that went bump in the night over the last three quarters of a century, the markets have found a way to rally based on good, old-fashioned corporate earnings. 

Oh, by the way, had you remained invested in the DJIA from Jan. 1st 1987 thru Dec. 31st 1987, including Black Monday, you would have made 2.26%. Just sayin’.

As ever, if you have any questions or comments, please drop me a line.

Kind regards, Brendan

"If you don't know where you're going, any road will take you there."
- Lewis Carroll,  Alice In Wonderland

Brendan O’Brien, CEA
Proprietor - Hibernia Financial Group
Senior Financial Advisor – Manulife Wealth Inc. 
Life Insurance Advisor – Manulife Wealth Insurance Services Inc.

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