Believe it or not, but we are only in the month of March. Yet, it has been quite the year already given the policy shifts and turns undertaken by the U.S. administration. While many people, including ourselves, are “tariff-ed” out at this point, we discuss some of the early impacts from the trade war thus far.
At the risk of being obsolete, we will refrain from providing much of an update on where things stand with respect to tariffs. On the one hand, temporary exemptions and delays have emerged recently, which lessens the immediate blow to the economic outlook, and potentially moves us further away from a worst-case scenario. But on the other hand, the constant upheaval in policy has made an already uncertain environment even more unpredictable. Not surprisingly, it is beginning to weigh on consumers, businesses, and investors.
A variety of different surveys released in the U.S. over the past month have suggested a deterioration in consumer sentiment. It has been felt across all demographic and most income groups. Expectations on future business conditions, jobs availability, and income prospects have worsened. Not surprisingly, references to trade and tariffs were evident from those consumers that responded to the survey, as were comments around inflation. On the latter, there has been a notable uptick in short and long-term U.S. inflation expectations as consumers have started to brace for the impact that tariffs may have on the price of every-day goods and services.
On the business front, recent U.S. economic reports suggest some signs of weakness are starting to emerge. Business activity and new order measures within recent services sector reports are pointing to a slowing in growth through the first quarter of the year. The surveys highlighted that policy uncertainty is weighing on demand growth, both domestically and outside the country. Separately, the U.S. Federal Reserve’s “Beige Book”, which is published eight times during the year, was released recently. It provides a collection of anecdotal feedback taken from a variety of sources across the U.S. Overall, it suggested a slowing of growth across some of its districts. The report highlighted that some manufacturing and construction firms suggested tariffs were already raising material costs and creating uncertainty for long-term pricing and investment decisions.
Global equity markets have been weaker in the face of these developments, with signs that investors are getting increasingly uncomfortable. Gages of investor sentiment have shown a significant pickup in the percentage of investors that are bearish (ie. negative on the outlook) and vice versa (a large fall in the percentage of investors that are bullish). Yet the equity market declines have been relatively modest thus far. Notably, the U.S. stock market has underperformed other markets including those in Canada, Europe, and Asia. It is hard to completely rationalize this, but it may be attributable to the fact that U.S. stocks were quite expensive relative to others, which left them potentially more vulnerable to a “risk off” scenario. Historically speaking, investors typically look to reduce risk in their portfolios in an environment of heightened uncertainty, and expensive stocks can sometimes be an easy funding source.
The question for investors is: what’s next? It is possible the market may see some relief in the short-term given the recent tariff reprieve. Better yet is the possibility of a less threatening tariff outcome by April should some favourable negotiations transpire in the weeks to come. However, the risks of a longer lasting trade war are high enough that caution is warranted in our view, even if the markets have fared better so far than we would have expected. As a result, we continue to review and assess our portfolios to ensure that our clients’ exposures are appropriate.
Should you have any questions, please feel free to reach out.
Beth Arseneau, FMA, CIM
Portfolio Manager
416-960-4592
beth.arseneau@rbc.com
