July 2025
On April 2nd, markets were jolted when President Trump imposed a series of aggressive—and, to many, bewildering—tariffs on imports from allies and adversaries alike. From Canada to Vietnam, countries were faced with the looming threat of punitive duties that risked disrupting global trade. Meanwhile, Elon Musk—Trump’s self-proclaimed “cost-cutter-in-chief”—made headlines with his vow to drastically slash U.S. government spending.
Investors reacted swiftly and severely. Between April 2nd and April 7th, the S&P 500 fell by almost 11%, while Canada’s S&P/TSX Composite index dropped by around 10%. Even some of Trump’s staunchest allies, many of whom support a tougher stance on trade, viewed the proposed tariffs as draconian and the implementation as far too abrupt.
Meanwhile, fears mounted that sharp government spending cuts would fuel job losses and tip the economy towards recession. Uncertainty spiked, volatility surged and investors scrambled to assess who might win—or lose—under this new regime.
TACO TRADE
However, as is often the case, just as fear reached its peak, signs of calm began to emerge. The timeline for implementation was softened, trade discussions were initiated, and investors gradually accepted that the worst-case scenario might be avoided.
After all, this is Trump. The announcement on April 2nd may well have been an opening gambit—designed to rattle trade partners and show political supporters that action was underway. Wall Street coined a phrase for the market’s new stance: the “TACO trade”—Trump Always Chickens Out.
Meanwhile, Musk’s ambitions to overhaul government spending proved to be more aspirational than actionable, as his efforts resulted in modest budget cuts before he quietly left.
RAPID MARKET SURGE
What followed was a classic market reversal. As fear subsided, opportunities arose. Companies adapted quickly—shifting production to more stable regions and adjusting their pricing strategies in anticipation of potential tariffs. From April 2nd close to the end of the second quarter, the S&P 500 surged by 23%, while the TSX gained 18%.
Notably, negative headlines often overlooked developments that could bode well for investors. Economic indicators such as employment remain more resilient than many anticipated. In addition, fiscal stimulus from Trump’s recently enacted tax bill, combined with NATO leaders’ commitments to increase defence spending, should help to boost growth.
OUR ANSWER TO THIS VOLATILITY
In response to market volatility, Pembroke adopted a selective repositioning strategy, adding to high-conviction positions and reallocating capital from underperformers to businesses better poised for recovery. For the most part, however, we stayed the course.
We remained confident in the strong balance sheets, healthy free cash flow and experienced management of our portfolio companies. In times of market stress and conflicting messages, restraint is often the best strategy. Fortunately, many of our management teams took proactive steps—re-sourcing materials, cutting costs and protecting margins—amid the uncertainty.
Now, as new trade deadlines approach, Trump is once again threatening unilateral tariffs. However, the TACO trade is in full swing for now. Clearly, investors are anticipating a less severe outcome and a return to pro-growth economic policies.
QUALITY BUSINESSES, QUALITY GROWTH
At Pembroke, we do not try to forecast the next headline from Washington, Ottawa or London. Instead, we focus on what we can control: selecting high-quality businesses with robust fundamentals and balancing our portfolios across a range of sectors.
From Technology and Healthcare to Industrials and Retail, we are inspired by the innovation and growth potential we see. Valuations are attractive, fundamentals are solid and there are plenty of opportunities. The sky is not falling. On the contrary, the economic growth outlook is better than many expected, and recent policy announcements herald stimulus from the U.S. to Canada and across Europe and China.
We encourage our clients to be patient and to work with their Pembroke representative to ensure that their portfolios are aligned with their long-term goals.
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Disclaimer
This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.
