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’s 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. That being said, a recession is by no means a foregone conclusion. Central banks like the U.S. Federal Reserve are unlikely to stand pat should economic trends deteriorate.
We continue to tactically manage portfolios in this environment and 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.
Enjoy your weekend.
Tim