DIARY OF A PORTFOLIO MANAGER
April 4, 2025
“Take it easy, take it easy
Don't let the sound of your own wheels drive you crazy
Lighten up while you still can
Don't even try to understand
Just find a place to make your stand and take it easy”
-Take it Easy, The Eagles
Good afternoon,
Much easier said than done…taking it easy, that is.
The Rose Garden presentation regarding Liberation Day still has me confused. The chart showing the tariffs charged by other countries is based on math that makes no sense. It showed ‘tariff’s’ charged by other countries where, in reality, it’s more a function of an odd calculation of trade deficit. Global equity markets fell very sharply in response to this (markets were strong Monday – Wednesday) and 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.
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 aluminum.
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 has 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.
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 to some degree. Those that have an ongoing cash draw have cash on hand for that plus dividends coming in and bonds coming due. The plans that we build for you 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. Reacting or panicking is a surefire way to derail your medium to long term plan.
Here are some pieces from the broader RBC team:
U.S. trade policy is taking a more restrictive turn with potential implications for Canada’s economy and equity market. For investors, we believe maintaining a disciplined approach and resisting knee-jerk reactions to headlines will be the best way to navigate through what could be repeated bouts of market volatility.
Canada Confronts US Protectionism: Mobile-friendly link
Global Insight Weekly PDF link
And, a couple recent podcasts:
Eric Lascelles (Chief Economist) - Canada under tariffs: Analyzing trade and economic implications
Eric Lascelles evaluates the latest tariff changes and their impact on financial markets, with particular focus on Canada, noting that Canada's evasion of extreme tariffs could potentially boost its appeal to investors. He underscores the economic climate's unpredictability and stresses the importance of remaining focused and informed in these times. [20 minutes, 1 second] (Recorded: April 3, 2025)
Stu Kedwell examines the repercussions of new U.S. tariffs on financial markets, noting the potential for reduced global economic growth and its effects on commodities. Stu also underscores the importance of active management and being prepared to adjust and rebalance portfolios in response to the evolving economic landscape. [20 minutes, 43 seconds] (Recorded: April 3, 2025)
I hope that you have a pleasant weekend.
Regards,
