DIARY OF A PORTFOLIO MANAGER

March 21, 2025

“Every day I work so hard
Bringin' home my hard-earned pay
Try to love you, baby
But you push me away”

-Dazed and Confused, Led Zeppelin

Global markets have benefitted from the lack of trade-related noise over the past few weeks, with markets outside of the U.S. continuing to outperform year-to-date. Despite the relative calm on the tariff front, there were important developments.

Notably, another interest rate cut by the Bank of Canada, the appointment of Mark Carney as Canada’s Prime Minister, and reports that a federal election will take place next month.

Overseas, a partial ceasefire was negotiated between Ukraine and Russia. Meanwhile, some budget changes were approved in Germany that set the stage for a significant increase in military spending and infrastructure investment. Also noteworthy is the U.S. Federal Reserve’s latest update, which pointed to some stagflationary effects – where growth slows, and inflation rises - this year.

The U.S. Federal Reserve kept interest rates unchanged at its recent meeting. Nevertheless, it revised a few of its economic projections. Its forecasts for economic growth (i.e. GDP) were revised lower: to 1.7% (from 2.1%) for 2025, and to 1.8% for both 2026 and 2027, respectively (from 2.0% and 1.9%, previously). Meanwhile, its inflation projection for this year was revised higher, to 2.7% from 2.5%, but its estimates for 2026 and 2027 were left unchanged. In summary, it expects lower growth through the next few years, and a temporary bump in inflation this year before it reverts to lower levels. The Fed also revealed that, on average, its policy makers expect two interest rate cuts this year, followed by two more in 2026, and one in 2027, which was unchanged from its prior assessment late last year.

The Federal Reserve’s official statement suggested it felt that U.S. economic activity was “solid”, with a healthy labour market, and inflation that remained “somewhat elevated”. It acknowledged that uncertainty had risen, and it was paying close attention to the risks of both sides of its dual mandate: unemployment and inflation.

Chairman Jerome Powell’s comments during his press conference were more interesting, in our view. He acknowledged some slowing in consumer spending, recent deterioration in sentiment, and higher levels of uncertainty resulting from a U.S. government that is making big changes in policy. But he reminded people that the U.S. economy was at least starting from a position of strength. Meanwhile, he was less concerned about an uptick in consumer inflation expectations and characterized any potential inflation stemming from tariffs as “transitory”. The latter remark was not particularly comforting as he also used the same term to describe inflationary pressures that emerged during the early stages of the pandemic.

Our simple takeaway is that the Fed is nearly as uncertain over the trajectory of the U.S. economy as everybody else. It is hard to fault them as government policy has been erratic through the first few months of the year. As a result, the Fed now finds itself in a more difficult position where growth is slowing, and inflation is rising. A recent RBC report compared the Fed’s position as being akin to a goalkeeper trying to save a penalty kick in football (i.e. soccer). If they overcommit to one side, they increase the odds of saving the economy from that scenario (i.e. slower growth), but it may then become more difficult to prevent the other scenario (i.e. higher inflation) from unfolding. As a result, a more suitable approach may be to stand pat, which is what they are doing for now.

We are not necessarily standing still. Given a more cautious mindset, we continue to review portfolios, ensuring that asset allocations are in-line with the targets set in our investment policies and financial plans. As a rule, we tend to get more enthusiastic about investing opportunities when negative sentiment is at an extreme and valuations are cheap. The sentiment side, while not yet at an extreme, has turned more negative this year, but valuations still have a way to go in our view.

Navigating the Impact of U.S. Tariffs on Canada

RBC recently held a call with our Chief Economist discussing tariff impact. Here are my notes from that call:

• Frances Donald started by comparing the Canadian economy to a lazy person with a weak immune system. Why? Not a lot of good things going on. Not a lot of diverse economic activity. General sense that productivity isn’t what it should be. Overwhelmed food banks would be a good example of this.
• Tariff shock doesn’t help a not great situation.
• We can’t put a number on exactly what will happen because so many factors impact how a tariff flows through the economy. Even threats create impact. Households and businesses tend to freeze. Uncertainty is a concern. People can’t decide and waiting on making investments. BOC data indicates people holding off. Even before tariffs hit, some people front load by buying things before prices rise. Stockpiling. Currency moves also have impact.
• What is level of Government support?
• Bank of Canada met March 12. Cut rates 25 bps. More to come. Why? Economy slowing even before tariff news. Additional support being provided. 2 more cuts at least. They feel that they should not be the only policy to assist Canadians. Government will have to step up like they did during Covid, but this is not the same environment. Rates to zero and handing out money not the right support.

What is the Canadian dollar going to do?

• A lot more weakness ahead? Tariffs will impact. Currency market doesn’t wait for rate moves. The good news is that we are not expecting more CAD$ weakness but also not much strength either.
• Back to 2018, Trump admin claims it was a good experience. Tariffs were raised (mostly China) and we didn’t see inflation.
• Real concern came up about 2 months ago from businesses. Tariffs are also painful for US as they create bigger price increases. Doesn’t mean job losses or recession but not helping inflation.
• The Trump put was assumed to help equity markets, but verbiage says this is not the case. Smaller Govt with lower tax policy is the mood.
• Trump admin looking for strong US dollar to offset price impacts.
• High income Americans doing well with higher rates. Top 10% own 83% of stocks. Low-income segment of the population has been in recession already. They spend a higher % on food and are typically net debtors.
• A recession is simply 6 months where economy retracts, and employment rate slows. Markets not pricing in tariff war / no tariff war or recession / no recession but somewhere in the middle.
• Full tariffs create a problem for a year but not expected to be longer lasting. US invested in tech and AI. Needs power and guess who has abundant cheap power. Canada. Need access to precious materials and guess who has them? China, Africa and Canada. Who is the easier to deal with? Making aluminum is also very power intensive.
• America doesn’t need jobs. They need workers, 40% of Americans don’t work. One unemployed person looking for a job for every three retired people. A solution is to increase the birth rate which isn’t happening. The other is immigration which the US is pulling away from.
• NAFTA and USMCA allowed us to trade freely without barriers and US, Canada and Mexico all benefited from it.
• In Canada, some people will need help, and some don’t. Monetary policy such as rate cuts applies to all so maybe more than necessary. Provinces can be engaged in more targeted support.
• Canada could be in a good position if it chooses to be. We can feed the World and heat the World. We have lots of tangible things. Lots more talk about services. There is some tech activity that may not be obvious. Reducing inter Provincial barriers seems to be obvious. IMF says our inter Provincial trade barriers equate to a 21% tariff. Fixing this could be a good offset to US tariffs.
• Many Canadians also live in expensive cities rather than less expensive parts of the country.

What does this mean for investment portfolios?

• Prolonged uncertainty can be a challenge.
• We are coming off some terrific years; investment wise, so a pullback should not come as a surprise
• Credit markets not indicating ongoing risk
• Stock market is forward looking and based on future expectations
• GDP growth expectations shifting lower, so recommendation is to be mindful of risks and ensure asset mix on target

I hope that you have a great weekend.

Regards,