A few topics our newsletter touches on this month:

• Our Thoughts: Weathering a Trump Trade Storm
• By the numbers: February
• Other Things: Disruptors & 10 minute take podcasts (10MT this month tackles something overlooked in a lot of trade war reporting – what can happen on the services side?)

 

Before we get into the tariff discussion - Our whole team would like to recognize Mark as he celebrates 30 years in the wealth management business this week.

 

Our Thoughts: Weathering a Trump Trade Storm

 

Global equity markets fell more sharply this week following the revelation from the U.S. administration that its reciprocal tariffs will be much broader and larger than most investors expected. The “Liberation Day” announcement raised the spectre of a more global trade war between the U.S. and many, if not all, of its trading partners. Below, we summarize recent trade developments, its implications on the economic outlook, and the response across equity, fixed income, and currency markets.

 

Tariffs have now gone global. In the past few days, the U.S. unveiled a 10% baseline tariff on all imports, plus much higher individual duties to be applied on close to sixty countries. The average U.S. tariff rate is now estimated to be just above 23%, up significantly from the 2% level from the beginning of the year. In a somewhat positive surprise, Canada and Mexico were spared, as neither country will face additional levies. This removes, for now, some of the worst-case scenarios that investors were anticipating for both countries. As a reminder, Canada is already facing a 25% tariff on goods, including autos and parts made in Canada, not covered under the USMCA trade agreement signed in 2018, a reduced 10% duty on energy and potash not covered under USMCA, and a 25% tariff on steel and aluminium.

 

The market reaction to the tariff developments was predictable in some cases, and surprising in others. The U.S. stock market bore the brunt of the weakness, continuing a trend that has been in place this year. Technology and industrial sectors were particularly weak as investors are increasingly questioning the resilience of the U.S. economy and the growth expectations embedded in its stock market. The Canadian market fared a bit better, with bank stocks demonstrating some resilience, helping to offset some of the weakness from the Energy sector. Overseas equity markets were also lower, albeit to a lesser degree.

 

Not surprisingly, government bond yields moved lower (and prices higher) as investors have grown concerned about global growth and have sought safe-haven assets. The move in U.S. bond yields was noticeably more pronounced than in Canada. The bigger surprise may have been in the currency markets with the Canadian dollar, Euro, and Japanese Yen, among others, rising meaningfully following the tariff announcement. Traditionally, the U.S. dollar has been the key beneficiary in a “flight to safety” environment marked by equity market selloffs. But, that has not been the case recently, and may be indicative of investors reassessing the U.S. from multiple perspectives.

 

The high level of uncertainty in recent months caused by the threat of tariffs may have already resulted in some economic impact in the form of slower spending, investment, and activity. But the tariff announcement over the past week represents a new possible shock to the global economy that could result in higher prices across a range of products, lower spending, and shifting supply chains as businesses and consumers look for substitutes where possible. And while a recession is by no means a foregone conclusion, the risk of one occurring has risen. Central banks like the U.S. Federal Reserve are unlikely to stand pat should economic trends deteriorate but lowering rates in the face of rising prices may be somewhat uncomfortable for them.

 

We continue to manage portfolios in this environment with a degree of caution, ensuring our equity exposures have been rebalanced and do not exceed the targets laid out in the investment policies and financial plans that we have designed for our clients. Those plans assume that market drawdowns, such as the one we are living through, may occur from time to time and to varying degrees. Sticking to a plan ensures that we remain disciplined in our approach which is particularly important during periods of market duress where emotions can often get in the way.

 

Should you have any questions, please feel free to reach out.

 

By the numbers (March):

The TSX was down 1.5% while the S&P 500 was down 5.6% in U.S. dollars (down 6.1% in $CAD). The Europe, Australia & Far East index (EAFE) was down 1.4%, while the Emerging Markets index led being only down 0.2% (helped by Chinese and Indian markets holding positive on the month). The Canadian bond market was down 0.3%.

 

Interesting Listening/Reading:

• 10 Minute Take podcast: Are Services Immune to the Trade War?
• Disruptors - A dynamic 30 min RBC podcast co-hosted by John Stackhouse and Sonia Sennik about reimagining Canada’s economy in a time of unprecedented change.
  • Scammers, Fraud, and Deepfakes: The AI Arms Race
  • The Cleantech Edge: Tackling Methane Emissions with Canadian Innovation
• To check out our Global Insight Monthly for March find the link here.
• Global Insight Special Report – Bracing for Market Impact of Tariffs

 

Regards,

Mark, Peter, Sarah, Corinne & Nathalie

 

Gallivan Wealth Management of RBC Dominion Securities