Markets are under pressure following sweeping tariffs – U.S. president Trump unveiled yesterday a sweeping new set of tariffs imposing a minimum 10% tariff on all imports coming to the U.S. that will go into effect on April 5. In addition, the new administration will impose higher reciprocal tariffs on the countries with which the U.S. has the largest trade deficits. For example, China will face a 34% rate (on top of the existing 20%), Japan a 24% levy, Vietnam a 46% rate, and European goods will be subject to a 20% duty. The individual higher tariffs will go into effect April 9. Canada and Mexico were exempt from the new reciprocal tariffs for the goods that are compliant with the USMCA (U.S.-Mexico-Canada) agreement, but duties on several goods, including aluminum, steel and autos, will remain in place.
The new actions are estimated to raise the effective U.S. rate on all imports from 2.3% last year to around 25%, the highest in at least 100 years. The new announced tariffs rates are higher than most expected and thus are triggering a broad sell-off in global equity markets. The S&P 500 fell 4.8%, the largest daily drop since 2020, and the TSX fell 3.8%, with energy and technology posting the largest declines. Government bonds saw a flight to safety. From Canada's perspective the announcement was better than feared, with the effective U.S. tariffs likely to be 8%. This suggests that the economy will likely avoid a recession, but not a growth slowdown.
A trade war poses downside risks to growth that may outweigh impacts on inflation - The U.S. is less dependent on trade compared with many of its largest trading partners. However, trade uncertainty has already led to a drop in consumer confidence, and the new tariffs, which act as a tax on the consumer, will likely weigh on spending and business investment. With demand weakening, the rise in inflation will likely be smaller than the potential decrease in economic activity. Estimates based on a 2018 Federal Reserve model suggest a potential 2.4% hit to U.S. growth and a 1.4% rise in prices*. This growth-negative and inflation-positive effect is fueling investor concerns around stagflation and could possibly lead to downward revisions to corporate profits. However, that assumes that the additional revenue raised will not be recycled in the economy to support growth, and we know that pro-growth policies are also part of the administration's agenda.
In addition, we believe the Federal Reserve is more likely to step in to support softening economic growth and a potentially weaker labour market. Given the higher-than-expected magnitude of the tariff announcement, we could see the Fed cut rates potentially more than the two times outlined in its March meeting this year. While the potential for higher inflation from the proposed tariffs may give the Federal Reserve pause, we believe policymakers are likely to view tariffs as a one-off increase in prices, as opposed to an ongoing source of inflation that would de-anchor inflation expectations, though they will closely monitor the latter. Additionally, tariffs would most directly impact goods inflation, which carries a smaller weight in the consumer price index (CPI) basket compared with services inflation.
- Uncertainty will linger, but negotiations may provide an off ramp – Yesterday's announcement provides some clarity on the administration’s trade framework, but it does not answer all of investors’ questions. In response to the reciprocal tariffs, some countries may choose to retaliate, while others may try to negotiate, and this process may play out over time. The announcement mentioned that the new tariffs will remain in effect until the threat posed by the trade deficit is satisfied, resolved or mitigated, which potentially opens the door to country-specific negotiations that can provide some relief. Perhaps the higher-than-feared levies represent a high point and may be negotiated down, softening the blow to global growth. If the end result is a reduction in tariffs and trade barriers that other countries impose on the U.S., it will be a long-term positive for trade. But in the near term, high uncertainty will keep market volatility elevated.
Portfolio diversification remains critical – The potential risks to economic growth and corporate profits suggest that after falling into correction (10% decline from highs), the recovery in stocks will take a while to materialize. Patience and investment discipline will be key for investors to navigate the trade headlines, which no doubt will continue to dominate the market narrative.
Despite the headwinds, the fundamental drivers of market performance remain more supportive than harmful: 1) unemployment is low; 2) the Fed is remains in a rate-cutting cycle; 3) corporate profits are still likely to rise this year, though potentially less than the 10% expected before tariffs; and 4) the policy agenda may soon shift to pro-growth measures, such as tax cuts and deregulation.
The good news for investors with balanced and diversified portfolios is that those portfolios have weathered the pullback better than those with concentrated positions in U.S. large-cap stocks. Overseas stocks are up for the year, value stocks and the TSX have outperformed, and bond prices have rallied, helping smooth out the equity-market volatility. At a sector level, industrials, technology and consumer discretionary could be more exposed to tariffs based on their heavier reliance on imports, while financials, utilities and real estate are more insulated from a trade war.
While the immediate drawdown in stock markets may be jarring, we recommend that investors stay with their long-term investment strategy, emphasizing diversification and quality investments. Avoid making emotionally charged investment decisions, and remember that time in the market has proven to be a better strategy over time than trying to time yourself in and out of the market.
Angelo Kourkafas, CFA
Investment Strategy
Source: *Bloomberg
- Trump administration announces new tariffs: New U.S. tariffs were announced after markets closed this afternoon. The U.S. will levy reciprocal tariffs based on the combination of tariffs, trade barriers and currency interventions implemented by each country, effective April 9, with a 10% baseline, which is effective April 5. The new reciprocal tariffs do not apply to steel, aluminum, autos and auto parts, which are subject to other tariff orders. As examples, goods from China will face tariffs of 34%, and products from European Union countries will be levied at 24%. For Canada and Mexico, goods compliant with the U.S-Mexico-Canada Agreement (USMCA), will continue to be exempt from tariffs. These reciprocal tariffs will remain in effect until the administration determines that the threat posed by the trade deficit and nonreciprocal treatment is mitigated. Each country will have the opportunity to negotiate to lower their tariffs and other trade barriers in order to reduce U.S. tariffs. Stocks are down in after-hours trading on the news, with S&P 500 futures pointing to a lower open. Bond yields are down as well, with the 10-year Treasury yield falling about 5 basis points (0.05%) to 4.13%. In international markets, Europe was down, while Asia was mixed, as tariffs weighed on investor sentiment*. The U.S. dollar declined against major international currencies. In commodity markets, WTI oil traded higher, as a recent surge in Canadian crude imports to get ahead of new potential tariffs is likely not sustainable*.
- Employment report shows faster job growth – The ADP U.S. employment survey showed that private-sector employment (excluding government workers) grew by 155,000 in March, ahead estimates for 122,000*. Sectors with the largest gains were professional and business services (+57,000), financial activities (+57,000) and manufacturing (+21,000). February's national figure was revised upward by 7,000 as well. Annual pay rose 4.6% year-over-year.** The March employment report, known as nonfarm payrolls, to be released on Friday of this week should provide additional insight, as this report includes government workers. We believe these readings reflect a resilient labor market that should continue to provide growing employment and wage gains above inflation, which is supportive of consumer spending and the economy.
- Manufacturing activity above expectations – New orders for U.S. manufactured goods grew for the second consecutive month in February, rising 0.6%, above forecasts pointing to a 0.5% increase.* Shipments grew for the fourth month in a row. Orders for durable goods were 0.97%*** higher, just ahead of estimates for a 0.9% increase. Combined with other recent data, we believe these readings point to a gradual recovery in the manufacturing sector, which should help provide broader support for the economy and the labor market.
Brian Therien, CFA
Investment Strategy
Source: *FactSet **ADP ***U.S. Census Bureau
- Stocks finish mostly higher ahead of tariff announcement – North American equity markets finished mostly higher on Tuesday, with investors awaiting tomorrow's U.S. tariff announcement. The S&P 500 & TSX posted modest gains for the day while the Dow was little changed.* At a sector level, market leadership favoured growth-oriented sectors of the S&P 500, with communication services and consumer discretionary outperforming while health care lagged, driven by weakness in shares of Johnson & Johnson. Overseas, European markets finished mostly higher following eurozone inflation data that showed the consumer price index (CPI) rose by 2.2% year-over-year in March, down from 2.3% in the prior month.* On the economic front, U.S. JOLTS job openings for February were modestly below expectations, while the ISM Manufacturing PMI fell to from 50.3 to 49 in March. Bond yields traded lower, with the 10-year U.S. Treasury yield closing the day just below the 4.2% mark while the 10-year GoC yield fell to 2.93%.*
- All eyes on April 2 tariff announcement – Tariff uncertainty has weighed on markets since mid-February, with the S&P 500 down by roughly 8% from its all-time high.* An uncertain policy backdrop makes it difficult for corporations to plan for future hiring and capital spending, and this has caused anxiety in markets. Additionally, tariffs have the potential to raise prices and could lead to slower economic growth, which has contributed to the risk-off move over the past month as well. Tomorrow could provide more clarity into the administration's plans, with President Donald Trump expected to announce the U.S. reciprocal tariff plans. In our view, April 2 will help provide clarity into the administration's approach; however, we expect uncertainty to linger over the coming months as countries respond to the U.S. levies. For investors, volatility in markets can be uncomfortable; however, diversification has showed its merit amid the uncertainty. Despite U.S. large-cap stocks finishing lower by over 4% in the first quarter, overseas developed large-cap stocks gained 7% while emerging-market stocks rose by 3%.** Additionally, Canadian large-cap stocks gained roughly 1.5%.* Maintaining a well-diversified portfolio aligned to your goals can help investors weather periods of market volatility and benefit from rotating leadership.
- U.S. labour-market and manufacturing data in focus – U.S. labour-market and manufacturing data was in focus today with the release of JOLTS job openings for February and the ISM Manufacturing PMI for March. U.S. job openings fell to 7.6 million in February and were modestly below expectations. Job openings are a helpful gauge of the demand for labour, which has been strong over the past several years. In fact, despite today's modestly lower-than-expected reading, the number of job openings slightly exceeded the number of people unemployed in February, representing healthy labour-market conditions.* On the manufacturing side, the ISM Manufacturing PMI ticked lower from 50.3 to 49 in March, snapping a streak of two consecutive months of expansion. The ISM manufacturing PMI is a diffusion index where a reading above 50 represents expansion and a reading below 50 represents a contraction in manufacturing activity. Of note, the new orders component of the index fell to 45.2, the lowest reading since May 2023 and reflecting softening demand in the manufacturing sector despite certain industries reporting an uptick in orders as customers attempt to front-run tariffs. In our view, a sustained recovery in the manufacturing sector of the U.S. economy could be supportive of economic growth throughout 2025. Clarity on U.S. tariff policy and the potential for Fed rate cuts over the course of 2025 could provide support for the sector.
Brock Weimer, CFA
Investment Strategy
Source: *FactSet
**FactSet, Total return in CAD.
Overseas developed large-cap stocks represented by MSCI EAFE.
Emerging-market stocks represented by MSCI EM.
U.S. large-cap stocks represented by S&P 500.
Canadian large-cap stocks represented by S&P/TSX Composite.
- Stocks finish higher, with trade policy in focus – After opening the day sharply lower, North American equities finished mostly higher, as markets digested the latest trade headlines. Reports surfaced over the weekend that suggest the April 2 U.S. reciprocal-tariff announcement, which was expected to raise tariffs to match those of other countries, could be more aggressive than originally planned, which weighed on sentiment in early trading. These reports followed last week's announcement that the U.S. will tariff all autos not made in the U.S. Despite the lower open, stocks found their footing midday, with the S&P 500 and TSX both finishing higher for the day. Value-oriented sectors, such as consumer staples and utilities, were among the top performers of the S&P 500, while growth-oriented sectors, such as technology, lagged. Bond yields finished the day lower, with the 10-year GoC yield falling to 2.97% while the 10-year Treasury yield declined to 4.22%.* While there are plenty of unknowns in today's market, we believe investors would be better served focusing on what's known. As we outlined in our recent Weekly Market Wrap, we believe fundamental drivers of market performance, such as healthy corporate profit growth and a strong labour market, should be supportive of the economy and markets, despite the uncertainty.
- All eyes on April 2 tariff announcement – Tariff uncertainty has weighed on markets since mid-February, with the S&P 500 down by roughly 9% from its all-time high.* An uncertain policy backdrop makes it difficult for corporations to plan for future hiring and capital spending, and this has caused anxiety in markets. Additionally, tariffs have the potential to raise prices and could lead to slower economic growth, which has contributed to the risk-off move over the past month as well. On April 2, the U.S. is expected to unveil its plans for reciprocal tariffs, which are expected to match tariffs from other countries. More recently, reports have surfaced that suggest the U.S. could take a more aggressive approach when announcing reciprocal tariffs; however, details remain uncertain. In our view, April 2 will help provide clarity into the administration's approach; however, we expect uncertainty to linger over the coming months as countries respond to the U.S. levies. For investors, volatility in markets can be uncomfortable; however, diversification has showed its merit amid the uncertainty. Despite lackluster performance thus far in U.S. equities, international developed large-cap stocks are higher by over 9% and emerging-market stocks are higher by 4.5% through Friday's close.* Additionally, U.S. investment-grade bonds have gained over 2.5% year-to-date.* Maintaining a well-diversified portfolio aligned to your goals can help investors weather periods of market volatility and benefit from rotating leadership.
- Labour-market data in focus – In addition to the April 2 tariff announcement, markets are eyeing a busy week of labour-market announcements. Tomorrow will bring U.S. JOLTS job openings for February, where expectations are for job openings to tick lower to roughly 7.7 million.* Job openings are a helpful gauge of demand for labour, which has been strong over the past several years. In fact, through January the number of job openings modestly exceeded the number of people unemployed, representing healthy labour-market conditions.* Perhaps the most anticipated labour-market datapoint this week will be the U.S. nonfarm-payrolls report and domestic labour-force survey on Friday. Expectations are for U.S. nonfarm payrolls to grow by 123,000 and the unemployment rate to tick higher to 4.2%.* In Canada, employment is expected to grow by 23,000 in March, while the unemployment rate is expected to tick higher to 6.7%.* While labour-market conditions could cool from current levels, we believe they will remain healthy throughout 2025, providing support to economic growth.
Brock Weimer, CFA
Investment Strategy
Source: *FactSet
- Stocks move sharply lower after sentiment data falls – U.S. and Canadian equity markets closed sharply lower on Friday, down 1.5% to 2.5% across the board. The S&P 500 is about 1% away from re-testing the recent lows on March 13. The volatility continues to be driven by uncertainty around U.S. tariff policy, as well as fresh sentiment data this morning, which pointed to weaker U.S. consumer confidence and higher inflation expectations. The Michigan Consumer Sentiment survey was revised lower from 57.9 to 57 in March, the lowest reading since 2022 and reflecting a softening mood from consumers amid the uncertain policy backdrop. The S&P 500 is on pace for the second month of declines and is down around 5% for the year. The technology-heavy Nasdaq, however, is down nearly 10% this year thus far, underscoring the rotation away from mega-cap technology sectors*. Meanwhile, the Canadian TSX is up about 0.6% this year, driven in part by strong performance in the materials sector. Markets are awaiting next week's April 2nd reciprocal tariff announcement, and many investors are likely remaining on the sidelines ahead of that news. The bond market, however, has remained a safe-haven asset class in 2025, as government yields have come down from recent highs. The 10-year U.S. Treasury yield, for example, has fallen from about 4.8% in mid-January to around 4.25% today*. In our view, yields will likely remain in the 4% to 4.5% range and could move towards the lower end if the Fed embarks on rate cuts later this year.
- Personal consumption expenditure (PCE) inflation slightly hotter than expected – Headline PCE inflation for February was in-line with expectations at 2.5% year-over-year, steady versus last month's reading. Core inflation, excluding food and energy, however, was up 2.8%, above forecasts of 2.7% and last month's reading of 2.6%*. While this implies that services inflation continues to remain sticky, we have not yet seen a substantial uptick in goods inflation. This may occur in a more meaningful way as tariff policy is implemented across a variety of sectors in the goods economy. Meanwhile personal consumption rebounded somewhat in February, up 0.4% for the month after falling 0.2% the prior month. Real spending, adjusted for inflation, was up more modestly at 0.1% after falling 0.5% the month prior*. Overall, the data shows households that continue to spend despite stickier inflation trends, perhaps ahead of potential tariff policy updates.
- Tariff policy update set for April 2nd – Tariff policy, and the uncertainty around the size, scope, and timing of potential tariffs, have weighed on stock market performance. This is largely because 1) markets do not like uncertainty, and 2) the potential impacts of tariffs could mean higher prices and lower consumption overall. However, we expect to see some more clarity on tariff policy coming on April 2 as the U.S. administration unveils its reciprocal tariff policy. In our view, the administration may be taking a bifurcated approach to tariffs: certain industries will be deemed critical, including steel and aluminum (for defense), semiconductors, and perhaps autos and pharma, while reciprocal tariffs with key trading partners may be more of a basis for negotiation. Once tariff policy is outlined and in place, while there will be ongoing debate and adjustments made, consumers and corporations should have a better sense of the policy backdrop in which they are operating. And the hope is that policy focus then shifts to a more pro-growth agenda that includes tax reform and deregulation, which could support better market sentiment overall.
Mona Mahajan
Investment Strategy
Source: *FactSet