Ask The Experts - June 2025
All answers are provided by 5i Research.ca
Q: A dark 2025/2026 scenario would be a mild recession in Canada, and a more serious recession in the U.S., both deepened at some point by a U.S. dollar crisis due to massive deficits and chaotic politics. How should a TFSA be positioned to weather this? Dividend stocks versus bonds? How much of portfolio in gold stocks? How big a cash allocation? What else?
A: Our research shows that recessions are often quick (lasting 10 months on average) and the market is fairly efficient in pricing a recession in advance.
One of the key pieces to our research that we want to highlight to members is that on average, a recession is officially declared by NBER roughly 9 months after it actually starts. For example, if a recession started in January 2025, historically it would not be announced that a recession started earlier in the year until September 2025. Secondly, the market historically bottoms roughly 11 months after it actually starts. In this example, this would mean the market bottoms around November 2025. Thirdly, recessions typically end right around the time the market bottoms, but yet they are historically not declared to be over until several months after they actually end, by which time the market is likely on its way back to all-time highs, if not already at all-time highs. Again, in this scenario this would mean the recession has ended by November 2025, but it is not announced to be over until sometime in 2026.
Using a real example, in 1990, there was a recession that lasted 8 months. The market bottomed 3 months into the recession, and the recession was only officially declared 10 months after it started. This means that by the time the public officially heard of the recession, it had ended 2 months before, and the market had bottomed 7 months before then.
What all of this means to us is that once any official recession status is declared, it is likely a good time to be buying. Currently, Polymarket has the odds of a US recession in 2025 at 66%, quite high in our view, which we think is being priced into the markets. The average market drawdown for a recession is about 30%, and given we saw a 20% decline in the markets, we feel this means an investor that is expecting a recession to occur which drags the markets even lower should likely position themselves now, but once the official recession is declared to have started, this is when we think the markets are likely on their way back up.
For an investor looking to hedge against any potential downside, we think that gold, low volatility stocks/ETFs, and a cash position that one is comfortable with makes the most sense. Although, despite the potential for a recession to take place given slowing GDP fears, rising unemployment rate, and high interest rates, we are optimistic on the markets and feel that the intermediate and long-term potential is skewed to the upside.
Q: I recently read an article saying Goldman Sachs reports their base case for US tariff negotiations to include long-standing percents to be remain in place. As in, the rates may or may not change from their present 10%. I am trying to make informed decisions about expected uncertainty and whether strategic portfolio balancing needs to be done. Appreciating we don’t have a crystal ball, don’t see the sustained tariffs as a likely outcome and would you recommend any responses to higher probability outcomes to this? For example- avoiding high-multiple US stocks emerging markets or others.
A: We feel that the exorbitantly high tariffs (145%+ on Chinese goods, etc.) are unsustainable, and political leaders have also expressed this. It is becoming clear that extremely high tariffs are unlikely to last long. In our view, similar to 2018, we feel these tariffs will mostly be scaled back, potentially to a scenario where it is only 10% on certain materials/goods (steel, aluminum, etc.). It is also worth noting that in 2019, the market fully recovered from a 20%+ drawdown caused by the US tariffs from 2018, and it wasn't until 2020 that a deal with China was struck on tariffs - ie. by the time official deals are inked, the markets are likely well above all-time highs. As the popular saying goes, 'if it's in the news, it's priced in'. This is why we feel investors today waiting for a China deal to invest in the markets are potentially going to miss out on most of the gains as the market moves back up.
We actually feel that high-growth, cyclical sectors (tech, industrials, discretionary) are likely some of the best performers coming out of this recent drawdown over the coming year(s). It is typically in times of high uncertainty that investors want to position offensively, whereas when the market is at all-time highs, a more defensive tilt can help protect against downside exposure.
Q: I'm considering shareholder yield as a factor for investing. Can I have your opinion of such a strategy and is there a favourable/preferred % when looking at companies??
A: A positive shareholder yield can indicate management has a strong focus on capital returns for shareholders. It can also indicate that the company is cash flow positive, and if not, then it is pulling from its cash balance, in which case, the trend will need to be assessed if it is sustainable. Some investors like viewing shareholder yield as it means management is aligned with investors and is disciplined in its capital allocation policy.
We tend to view 3% to 5% as being solid, and over 6% is generally quite strong. Although, breaking down the components of this yield is important - a 6% shareholder yield entirely through dividends may indicate a mature company with minimal growth opportunities left.