Yann Furic
B.B.A., M. Sc., CFA®
Senior Portfolio Manager, Asset Allocation and Alternative Strategies
What moved the markets:
Markets up at the end of January.
Policy rate cuts: more to come in Canada; few in the U.S. in 2025.
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OVERVIEW OF GLOBAL EQUITY MARKETS |
||||
|
Country |
Index |
Return |
Change |
Year-to-date |
|
Canada |
S&P/TSX |
3.48 % |
|
3.48 % |
|
United States |
S&P 500 |
3.50 % |
|
3.50 % |
|
|
Nasdaq |
2.37 % |
|
2.37 % |
|
International stock markets |
EAFE |
5.99 % |
|
5.99 % |
|
Emerging markets |
|
2.50 % |
|
2.50 % |
|
China |
MSCI China |
1.63 % |
|
1.63 % |
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 1.20% year to date (at January 31, 2025)
Source : Morningstar Direct.
Our analysis of events
- On January 29, the U.S. Federal Reserve kept its rate unchanged, as the markets had anticipated. Fed Chair Jerome Powell’s comments suggest that the next cuts, if required, will take place later in 2025. In addition, U.S. tariff policy could limit rate cuts, as it will be inflationary.
- On the same date, the Bank of Canada again lowered its policy rate by 0.25%, with inflation still within the target range. Uncertainty regarding the imposition of tariffs by the United States could alter monetary policy and lead to further rate cuts. At present, markets are anticipating two or three further cuts this year.
- In January, U.S. job creation was weaker than expected, with only 143,000 jobs added versus expectations of 175,000. The numbers for the previous two months (November and December) were revised upwards by 100,000 jobs. Wage inflation, however, was too high at 4.1% year-on-year.
- The addition of 76,000 jobs in Canada in January far exceeded expectations of 25,000, and there was also an increase in the participation rate, which is positive. A decrease in the unemployment rate was observed as well. On an annual basis, wage growth fell to 3.7%, below expectations of 3.8%.
- In both Canada and the U.S., the continued strength of the job market is moderating the risk of recession and reducing the likelihood of multiple interest rate cuts in 2025.
- The U.S. economy remains robust, which immediately reduces the urgency of rate cuts and creates a divergence between Canadian (more cuts) and U.S. (fewer cuts) monetary policies. The result is a decline in the value of the Canadian dollar, a trend which has been ongoing for some weeks now.
- 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 1.8% for December, down from the previous month (1.9%) and still within the Bank of Canada’s target range. In the United States, the annual inflation rate accelerated to 2.9% in December.
Understanding the Canada/U.S. situation: the turbulence of the new presidency
Since taking office on January 20, President Trump has issued a series of executive orders to speed up the implementation of his political agenda. Financial markets are reacting, sometimes strongly, to his speeches and actions.
Tariff announcements
For several months now, the markets have been preparing for the U.S. administration to use tariffs, mainly targeting China, to achieve a number of objectives. However, the tariff threats announced against Mexico and Canada came as a general surprise.
As we have seen over the past few days, the situation can deteriorate or improve quickly. From an investment standpoint, it’s still advisable not to panic and to trust your investment strategy.
Canada, like Mexico, has been granted a thirty-day respite before the tariffs are imposed, to allow it to find solutions to the U.S. government’s dissatisfaction with illegal immigration and the entry of drugs into the U.S. via the shared border. In all likelihood, the threat of tariffs will continue to hang like a sword of Damocles over these two countries, as well as over China and possibly Europe. This threat will cast a pall of uncertainty over corporate decision-making and possibly slow global economic growth.
The other side of the coin
By maintaining this uncertainty, one of the U.S. administration’s stated aims is to force companies to relocate their foreign production to the United States. This acceleration of de-globalization would lead to a loss of supply chain efficiency for some time, as well as a significant increase in operating costs.
The imposition of sweeping tariffs worldwide would have several harmful effects.
- The increase in the price of imports caused by the tariffs is an added tax on American consumers.
- The tariffs are also inflationary for the U.S. economy.
- This additional inflation will prevent the Fed from cutting key interest rates any further.
- The U.S. dollar will remain strong, which will limit exports and thus have a negative effect. U.S. exports will be too expensive for other countries around the world.
- U.S. corporate profits will be penalized by the strong U.S. dollar.
- Companies doing business with the U.S. will be under economic stress, as demand for their products could decline.
Just as during Donald Trump’s first term, the end result of all these negotiations will no doubt be more balanced, but countries doing business with the United States will be forced to develop new markets. Global deregulation will be necessary, whether for trade between Canadian provinces or between European countries.
Why increase tariffs?
It should be noted that the introduction of a tariff is usually intended to force a change in behaviour. For example, a U.S. company that buys a tariffed product from Canada must pay not only its Canadian supplier, but also the tariff to a U.S. government agency, which increases the cost of importing the product. This generates additional revenue for the government, while the company passes the bill on to its customers by increasing the product’s retail price, thus generating inflation.
Eventually, the company may decide to find a local supplier: from then on, the government will no longer receive tariff revenues, but possibly taxes on additional sales from local suppliers.
It’s important to understand, however, that it’s one or the other. In other words, the U.S. government can’t have its cake and eat it too.
Beyond the current uncertainty…
The Canadian and U.S. economies remain highly integrated, just as they were during Donald Trump’s first term. On both sides of the border, governments will be under pressure from business leaders to reach a new partnership agreement.
Sustained growth of the global economy, with minimal trade friction between the U.S. administration and the rest of the world, is still the best-case scenario.
Risk management
In the medium and long term, markets react to growth in corporate profits. As an investor, you need to look at longer-term factors and not be swayed by politics and media reports.
A geographically well-diversified portfolio with a mix of fixed- and variable-income securities has proven resilient in the past over a medium- and long-term investment horizon and is still the best solution.
In terms of securities, we continue to favour “quality,” which enables us to better withstand market ups and downs, and we remain on the lookout for opportunities that may arise.
Economic Indicators
Global Purchasing Managers’ Index 
Manufacturing segment indicators improved, with more than half of the thirty countries posting an index 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 possibility of sweeping global tariffs being imposed by the new U.S. administration could also 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 and the continued growth of the U.S. economy should limit further rate cuts. In this environment, the upcoming renewal of mortgages and corporate loans could force consumers and businesses to reduce their spending now in anticipation of higher-than-expected rates, which is negative.
Our strategic monitoring
We are monitoring U.S. tariff policies, inflation and consumer spending, as well as leading indicators for manufacturing production, the services sector and employment.
Caution and risk management remain our top priorities.
Our tactical approach
In January, we maintained our equity weighting in the tactical allocation strategy, with the economic outlook and market indicators still dictating an overweight position.
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 maintained our position in small cap stocks, which respond well to rate cuts and a likely reduction in regulations in several industries. We reduced our position in Canada and emerging markets and increased our exposure to Europe and Japan.
In the fixed-income component, we reduced the weighting of emerging market bonds and increased that of investment-grade U.S. bonds.
We continue to favour stocks in developed countries and focus on risk management.
To learn how our funds performed:
Main risks
- Sweeping protectionist policies in the U.S., such as the imposition of tariffs, without significant productivity gains, are likely to generate inflation and slow down rate cuts. Canada would be at a disadvantage in such a scenario, since our exports would be less attractive to our neighbour to the south. This situation, which could cause an economic slowdown and a resurgence in inflation, that is, an episode of stagflation, would be the most negative economic scenario for the stock markets.
- There is also a monetary policy risk.
- High interest rates for an extended period would result in lower corporate profits and sharply curtail household spending.
- It is highly likely that any inflationary scenarios that would keep yields on 5-to-10-year maturities at high levels will be avoided, as they would slow corporate investment and the repatriation of production lines to the United States.
- The Israeli-Palestinian conflict could have repercussions throughout the Middle East. The fall of the Syrian regime is an example.
- An escalation of the war in Ukraine could spread to other European countries.
- There is also a risk of worsening tensions between China and the United States over Taiwan and the possibility of a trade war.
Senior Manager, Asset Allocation and Alternative Strategies
Data source : Bloomberg
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