Since Wednesday, April 2, when the U.S. president initiated a global trade war, markets have declined by more than 10%. This marks the fourth time in 50 years such a decline has occurred, following the 1987 stock market crash, the 2008 financial crisis, and the 2020 pandemic.

Among developed countries, the U.S. market has taken the hardest hit, losing approximately 20% from its peak. Technology stocks have declined by about 30%.

The current downturn and heightened volatility may be due to several factors:

• The U.S. market had risen sharply over the past two years, far outpacing earnings growth.
• Certain stocks, particularly those related to technology and artificial intelligence (AI), were showing signs of a bubble.
• At the beginning of 2025, the price-to-earnings (P/E) ratio of the U.S. market stood at 24x—well above its historical average.
• Analysts were forecasting 15% earnings growth for 2025, but those estimates are now being revised downward.

Historically, the U.S. government and central bank have acted as stabilizing forces during crises, notably in 2008 and 2020. Today, however, the government is the source of the problem—unstable, unreliable, and questioning the very foundations of global trade that have been in place since World War II.

Meanwhile, the U.S. Federal Reserve has indicated that the ongoing trade war could lead to both an economic slowdown and higher inflation. As such, it does not intend to stimulate the economy in the near term.

Our Current Positioning

Our objective remains to outperform our benchmarks over the long term with reduced volatility—by participating in up markets and limiting losses in down markets.

Earlier this year, some questioned us for not fully participating in the exuberance of the tech rally. However, we maintained a prudent diversification strategy. Our portfolios included a high proportion of cash, high-quality fixed income securities, and more stable equities that had underperformed over the past two years. This strategy is serving us well today.

Cash

Our portfolios currently hold an average of 16% in cash. This level was increased in late 2024 as we found fewer attractive investment opportunities.

Fixed Income

We maintain an average exposure of 29% to fixed income. Allocations vary depending on individual risk profiles and client circumstances. These holdings are almost exclusively short-term and high-quality bonds, providing solid after-tax returns. They are proving to be very stable during this period of market turbulence.

Equities

The remaining 55% is invested in equities. While recent market declines have impacted this asset class, our equity positioning is designed to provide resilience:

• Defensive stocks: About 44% of our equity exposure is in defensive sectors, which tend to outperform during crises. This is significantly higher than index levels. These holdings are primarily in consumer staples, healthcare, telecoms, and utilities.
• Stocks highly exposed to tariffs: Roughly 24% of our equities fall into this category. This is much lower than in major indices, as we have underweighted the two largest sectors—financials and technology.
• Stocks with limited long-term impact: The remaining 32% are in sectors that are less sensitive to tariffs. While these stocks are declining in the short term along with the broader market, they are expected to perform well in the coming months as investors recognize their resilience.

The U.S. and the U.S. Dollar

The United States is facing twin deficits: trade and fiscal. In a prolonged conflict with China, the country could quickly face shortages of key resources and materials. The fiscal deficit is at an unsustainable level (7.2% of GDP), and U.S. taxes remain among the lowest in the developed world. Despite its strength, the U.S. may be forced to rebalance its finances.

At the beginning of the year, the U.S. accounted for 4% of the global population, 25% of global GDP, and 67% of global stock market capitalization—record highs. Its economy, driven 70% by services, runs a surplus in this area with the rest of the world. The idea that "the world benefits at the expense of the U.S." is therefore debatable.

The strength of the U.S. dollar has largely been supported by relatively high interest rates. However, we believe the dollar is entering a downward cycle—one that could support an improved U.S. trade balance over time.

According to the IMF, based on purchasing power parity (PPP)—a key long-term measure of currency valuation—the U.S. dollar is overvalued by approximately 20% relative to the Canadian dollar. In the past, when similar gaps have occurred, it has taken less than five years to return to fair value based on purchasing power.

Long-Term Positioning and Outlook

Our performance since 2020 and our diversified positioning have enabled us to navigate the current downturn with limited impact. The assets we hold are financially sound and well positioned to increase over the coming years. Staying aligned with your long-term financial goals, maintaining discipline, and remaining strategically invested are essential today.

Despite short-term uncertainty—during which we intend to remain cautious and selective—we believe current conditions are creating attractive long-term opportunities. Historically, periods of market decline have had minimal long-term impact, and rebounds occur when least expected.

We also expect significant geopolitical shifts to result from the current situation. Europe and Canada appear well positioned to benefit from this transition. We believe that natural resources will outperform over the next decade relative to the technology sector. This outlook also helps explain the U.S. government’s current focus on securing long-term access to strategic resources.

Combined with rising trade tensions, this is likely to reinforce long-term inflation. In this context, the Canadian market—which offers the most accessible and reliable natural resources for both the U.S. and Europe—is well positioned to stand out in the next economic cycle.