Yann Furic
B.B.A., M. Sc., CFA®
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
The new U.S. administration has provoked a veritable revolution by imposing sweeping tariffs.
The integration of the three North American economies is likely to trigger a renegotiation of the United States-Mexico-Canada Agreement (USMCA) sooner rather than later.
The use of tariffs in trade negotiations will be an additional variable to monitor in 2025, in addition to inflation and employment.
U.S. ECONOMY VS. GLOBAL ECONOMY: INSTABILITY AND UNCERTAINTY
February 2025 was heavily influenced by geopolitics and this situation is continuing into March.
Sweeping tariffs
For over thirty years, world supply chains have been globalizing and optimizing, resulting in lower production costs. Over time, certain measures have been put in place for different reasons in several countries, including protectionism in certain industries, quotas and tariffs.
After several weeks of threats, the new U.S. administration has provoked a veritable revolution by imposing sweeping tariffs with a view to achieving several goals at once, both commercial and relating to national security. The primary impact of these changes has been to drastically reduce supply chain efficiency and increase the price of goods produced.
Effects on the economy
Overall, virtually the entire global economy will be affected to varying degrees, with negative impacts on economic growth.
Because of the actions of the Trump administration, U.S. economic growth will most likely be weaker than anticipated. Moreover, inflation is likely to remain at a high level, which will not allow the U.S. Federal Reserve (Fed) to lower its key interest rate, except in the event of an economic slowdown coupled with job losses. This anticipated slowdown in economic growth will also be reflected in the value of the U.S. dollar, which will likely depreciate against other currencies, such as the euro.
The United States could therefore experience an episode of stagflation, during which economic growth stagnates while inflation persists.
The theme of artificial intelligence (AI) is still very much alive, but the arrival of China’s DeepSeek model, which according to the media is more efficient and less expensive, has cast a shadow over U.S. initiatives, even though the profitability of these new tools for their developers is not yet known. The question is: will this company make a profit?
Generally speaking, stock market indices fluctuate from day to day, but over the medium and longer term, it’s the earnings of the companies that make up the indices and their forecast growth, in addition to bond yields (mainly 10-year maturities), that determine stock market performance.
What about the USMCA?
In both Canada and Mexico, the imposition of tariffs will slow the economy. The integration of the three North American economies is likely to trigger a renegotiation of the United States-Mexico-Canada Agreement (USMCA) sooner rather than later. Current uncertainty is limiting business spending on new projects and reducing consumer confidence and purchases, which could lead to a recession in the three countries concerned.
In the case of Canada, having inflation under control should give the Bank of Canada some leeway to lower its policy rate.
European economies
In the wake of the German elections and U.S. threats to withdraw from NATO, the countries of Europe are ready to push ahead with a defence plan that will entail major military spending. Germany is even willing to incur substantial deficits to achieve this. European economic growth is weak, but so is inflation. Monetary policies (lower interest rates) and fiscal policies (increased government spending) should stimulate growth. Year to date, the European stock markets have outperformed the S&P 500.
Elsewhere in the world
As for emerging economies, a devaluation of the U.S. dollar would be conducive to their economic growth. China, for its part, announced measures several months ago to boost its economy.
In short, countries with the means to stimulate their economies, whether through fiscal or monetary stimulus, will be able to cope with the protectionist measures currently in place.
What moved the markets in February:
- Markets mostly down at the end of the month.
- Increased volatility due to tariff threats.
|
OVERVIEW OF GLOBAL EQUITY MARKETS |
||||
|
Country |
Index |
Return |
Change |
Year-to-date |
|
Canada |
S&P/TSX |
-0.40% |
|
3.06% |
|
United States |
S&P 500 |
-1.83% |
|
1.61% |
|
|
Nasdaq |
-4.42% |
|
-2.15% |
|
International stock markets |
EAFE |
1.40% |
|
7.47% |
|
Emerging markets |
|
-0.05% |
|
2.45% |
|
China |
MSCI China |
11.17% |
|
12.98% |
The return shown is the total return, which includes the reinvestment of income and capital gains distributions.
Source: Morningstar Direct.
Results – Canadian bonds
The FTSE Canada Universe Bond Index, which includes Canadian government and corporate bonds, has posted a positive return of 2.31% year to date (at February 28, 2025).
Source : Morningstar Direct.
Our analysis of events
- On March 19, the U.S. Federal Reserve is expected to keep rates at their current level. In addition, the U.S. tariff policy, which will be inflationary, could limit cuts in 2025.
- The Bank of Canada cut its policy rate by 0.25% on March 12, as inflation remains within its target range. Uncertainty regarding the imposition of tariffs by the United States could alter monetary policy and lead to further rate cuts. Currently, markets are anticipating two or three cuts this year.
- U.S. job creation was weaker than expected in February, with 151,000 jobs added versus expectations of 160,000. Wage inflation is too high, with wages up 4% year-on-year. The unemployment rate rose by 0.1%, to 4.1%, while the average number of hours worked fell slightly.
- The creation of 1,100 jobs in Canada in February fell well short of forecasts of 20,000, while in January, 76,000 jobs were added, versus expectations of 25,000. The unemployment rate year-on-year wage growth is still high at 4%.
- The fact that the U.S. economy is still strong reduces the urgency for the Fed to cut rates in the United States. The main consequence of a divergence between Canadian (more cuts) and U.S. (fewer cuts) monetary policies will be to reduce the value of the Canadian dollar, a trend that has been in place for some time.
- The use of tariffs in trade negotiations will be an additional variable to monitor in 2025, in addition to inflation and employment.
- In Canada, the annual inflation rate was 1,9% for January, up 0.1% from the previous month (1.8%), but still within the Bank of Canada’s target range. In the United States, annual inflation accelerated to 3% in January.
Economic Indicators
Global Purchasing Managers’ Index 
Manufacturing segment indicators remained stable, with more than half of the thirty countries in the index posting a reading above 50 (expansion). The services segment continues to improve and remains robust.
Inflation rate
Overall, inflation is falling and continuing to move in the right direction, but its speed of deceleration is slowing. Central banks are likely to make fewer rate cuts than anticipated a few months ago. The imposition of indiscriminate tariffs worldwide by the new U.S. administration could create inflationary pressures in 2025.
Benchmark rates in Canada, Europe and the United States 
Interest rates have been falling for several months now. Fears of renewed inflation in the U.S. should limit further rate cuts. In contrast, Canada and Europe are facing tariff threats, and their weaker inflation is enabling their central banks to lower rates further.
Our tactical views
In February, we increased the weighting of equities in the tactical allocation strategy, mainly in Europe, Japan and Australia (EAFE), as well as in emerging markets, which benefit from a weaker U.S. dollar.
In the United States, we maintained our position in large cap growth stocks, which react positively to stabilizing interest rates, as well as in stocks with a track record of dividend growth which are more defensive.
We also maintained our position in small cap stocks, which respond well to rate cuts and a likely reduction in regulations in many industries.
In the fixed-income component, we reduced the weight of bonds but increased their quality by holding only Canadian and U.S. government issues.
We continue to favour stocks in developed countries and focus on risk management.
To learn how our funds performed:
Senior Manager, Asset Allocation and Alternative Strategies
Data source : Bloomberg
The opinions expressed here and on the next page do not necessarily represent the views of Professionals’ Financial. The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. Please consult your Wealth Management Advisor.
