January 2025
2022 felt like the end of the world for equities. The S&P 500 fell 18%, the Russell 2000 fell 20%, and the S&P/TSX Composite fell 6% as inflation reared its head and central banks around the world raised interest rates. Then, contrary to expectations, there was a rally in equities in 2023, and again in 2024. As always, fear creates opportunity for the patient and opportunistic investor. Emotional reactions to market declines are generally not helpful in making decisions at the most critical times.
In 2024, too, the same small group of companies drove most of the market’s gains. The Magnificent Seven were indeed magnificent and deserve a place in everyone’s overall investment portfolio. At the same time, the fact that Apple is worth 117% of the entire Russell 2000 index, as it was at the end of the year, is a reason to pause, remember past bubbles and remain diversified.
Donald Trump, Part Two
We said goodbye to him in 2020, only to see Trump stage an almost impossible political comeback to reclaim the US presidency. Once again, as in 2016, many fear the worst—tariffs, conflict, inflation and more. But rude and blustery rhetoric aside, what about the economic benefits of less regulation, lower taxes and smaller government? Trump’s election carries risks, but it could also bring investment opportunities.
The checks on his power are real, from state governors and senators to a narrow majority in Congress and a robust judiciary, so the actual progress Trump makes on radical change is likely to disappoint his most ardent supporters, which in turn should give comfort to his opponents.
That said, his administration clearly has strong ties to business and his goal is to revive economic growth, both of which are positive for equities. We are not predicting a strong or weak 2025—that timeframe is too short for our liking. We are simply suggesting that there are at least as many reasons to be positive about equity markets as there are reasons to be concerned.
Custodians of Your Investments
As custodians of your capital, it is not our job to judge politicians. Our role is to be a steady hand in turbulent markets. In other words, to put difficult years like 2022 or surprising election results into perspective, helping to frame them as opportunities rather than reasons to sell.
We are responsible for providing portfolio diversification, staying focused on our investment approach and taking the long view. We spend our time researching companies that we believe can add to your wealth over a multi-year period, by growing earnings per share and cash flow. We identify companies with aligned and proven management teams that are financially prudent. We do not spend our time predicting interest rates or Gross Domestic Product (GDP) growth.
For every pundit who professes to know that central banks will cut interest rates faster than expected, we can find one who argues the opposite just as convincingly. The truth is that nobody knows, because economies and geopolitics are too dynamic. There are too many factors at play. That is why we focus on understanding companies and their growth opportunities.
Share prices can be volatile. There is no doubt about that. However, we encourage our clients to remember two important truths: historically, they go up more—and more often—than they go down; and, ultimately, earnings and dividend growth drive share prices. If you believe that the various companies in our portfolios, taken as a whole, will make more money for their shareholders in the future than they do today—that they will grow—then you should be confident that your patience will be rewarded with long-term gains.
Markets Outlook
Following Trump’s election, markets rallied in anticipation of pro-business policy announcements. In December, inflation fears returned and equities retreated from their highs as US central bankers predicted that interest rates would remain higher than many had hoped. The result is an attractive set-up for 2025 and beyond: compelling valuations in select areas of the market, the strong possibility of an active merger and acquisition environment, continued growth across a range of industries, and a potential business-friendly administration running the world’s largest and most dynamic economy.
Our message to investors is to stay patient and optimistic for the long term, always remembering that behind many of these jittery stocks are real businesses that are growing, generating cash flow and returning capital to shareholders. The tailwinds are at your back for the long term and you should let them work for you. Our job is to find great, differentiated businesses and stick with them. The rest will take care of itself.
As always, we encourage you to contact your representative should you want to discuss your portfolio allocations and investment objectives.
Other Articles Of Interest
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.
