SCHNEIDER INSURANCE UPDATE

Strong corporate profitability and concerns about renewed inflation have returned stock markets to historic all time levels.  That’s good news, given higher interest rates and the world appearing to be on the cusp of the greatest energy crisis in history.

It is a stark reminder.  Markets often don’t follow rational principles in the short or medium term.  

We are not expecting calm for long.   As of the beginning of June, 2026, there is little likelihood the supply crisis caused by the Iranian War is likely to diminish in the short run. 

Even if it finishes today, some 20-25% of the world’s oil and gas is and will be offline for years.  And each passing day threatens to actually worsen the damage, despite the mainstream media sugar coating it.   Concerns of stagnation and a tsunami like wave of supply destruction appear on the way.

You might think of it like a giant economic wave emanating from an offshore earthquake .  Its effect first hits the countries closest and then ripples outward.  Today, the disruption has already hit countries in Asia.  It is now moving through Europe with gas shortages expected by July as storage tanks run dry.

The result, oil shortages and corresponding increases in fuel prices (as in 300% cost increase for gas in the Philippines, while Europe’s costs have already almost doubled).  Thereafter, we will see the effects through inflation, as fuel costs dictate the price of virtually all goods due to manufacturing and transportation costs.  And as with Covid, we expect the knock on effects from the conflict to abound for years.

These are the type of price increases that can stop highly affected economies in their tracks, so it’s not surprising that Canada has just entered a technical recession and the IMF has forecast a likely global recession.

So Why Has The Market Remained So Strong In Light of a Crisis?  For A Few Reasons

Primarily Earnings and Inflation

Q1 earnings in the U.S. have been exceptionally strong with 84% of the S&P exceeding expectations.  It’s also become vogue to layoff large swaths of workers in the name of AI efficiencies – which go pretty much straight to the bottom line.  While this is not particularly good for unemployment or social stability, markets watch the profit numbers not the fall out.

Secondly, the U.S. are expected to have to print a large chunk of the $10 trillion dollars maturing over the course of the next year (on top of a growing $2 trillion+ budget deficit).  That should mean substantially increased inflation along with higher bond yields.  And while none of that is good for consumer confidence, historically inflation has pushed equity values up with it.

Thirdly, Kevin Warsh has now been confirmed as the new Federal Reserve Chairman.   It’ll be a balancing act as many believe that the U.S. is going to try to cut rates despite yields heading higher for virutally all major western economies.   If the do, these cuts may act to backstop the economy, but they will come at the cost of the U.S. dollar’s value, further driving up the cost of overseas products.

Assuming the Federal Reserve does print and circulate Trillions just to backstop existing debt obligations and (potentially thereafter) Trillions more to stimulate the economy (think Quantitative Easing or some new variation) the price of everything goes up.  And as we’ve mentioned, that has also included the values of the world’s best companies in the past. Inflation can be beneficial to asset holders but also punishing to those who do not own equity over the long term.  

The Delayed Iran War Effect

For most of us, beyond higher gas prices, we have yet to see any substantial effects of the Iran War.  Part of that is because of where Canada lies geographically, and part because we are a still largely a resource based nation.

That said, it is now clear that no amount of hope, threats or political leverage are likely to unclog the Hormuz Strait and it is highly unlikely that it is ever going back to how it was.

As in any major conflict opinions vary on who will come out on top, but many feel that the U.S. has bit off substantially more than they can chew and that the disruption may become the U.S’s Suez moment when looked back upon in history.

(For those of you who are not keen history buffs like we are here, in 1954, the U.S. refused to back Britain and France when they tried to take back the Suez Canal from Egypt.  The ensuing global loss of faith in the British currency led to the dissolution of the British pound as the global reserve currency.  The torch was thereafter passed to the U.S).

Every Major Conflict Drives Unexpected Change

The Second World War ushered in the nuclear age.  With it came nuclear medicine and nuclear power along with host of other unexpected inventions, such as the jet age fueling international tourism.

The Cold War brought us the space race, satellites, GPS and ultimately the Internet.

The Iranian War will no doubt change us in dramatic ways as well, whether that be with a move towards electrification and alternative energy or new geopolitical powers.

Regardless, it means one thing for sure…

Professional Management of Your Money Is More Important Than Ever

With disruption comes volatility.  And volatility uncovers value.  Wealth management at its heart is all about identifying and buying that value.  That applies whether your managers are looking at new rapidly growing companies, finding firms well below breakup value or finding misalignment in bond pricing.

Today that may mean opportunities in Canadian potash or oil companies.  It may mean new companies come to the forefront. But certainly sitting and doing nothing, hoping things return to the way they were, is not a strategy.  That’s why we employ some of the world’s best portfolio managers.  They use many of the world’s most sophisticated tools to manage your money. 

The Canadian Resource Buffer

We expect Canada will be somewhat buffered from this coming economic shock, largely due to our resources.  That said, the knockon effects will be substantial and thus certain regions and sectors are going to see some tough times with the changes and market volatility.  

Remember that, despite the fact it can be discouraging to watch day to day (even year to year), it’s particularly during these times of hardship that the next round of exceptional bargains are found and it is precisely during these times that portfolio managers can identify and take advantage of the best bargains for tomorrow. 

As always, if you’re concerned or if you’d like to review things, we’re here to help.

Mark & Sean