A Bumpy Start

The North American Markets witnessed a bumpy start to the year 2025. Nevertheless, the S&P 500 Index and S&P TSX Index advanced by about +2.7% and +3.3% for the month, respectively. Fixed Income markets also delivered positive returns with bond yields declining on both sides of the border. The Bank of Canada lowered its policy rates by +25 basis points to bring policy rates to +3.0% and the United States Federal Reserve decided to pause the rate cut cycle and held the rates at +4.5%. The bond yields on 2-to-10-year tenures were down by approximately 16-to-29 basis points in Canada while in the United States the decline was more modest at approximately 3-to-6 basis points. Despite the heightened uncertainty and choppy markets, the year 2025 has been off to a good start for investors.

The incoming US President had well telegraphed intentions to implement tariffs on the imports from Canada, Mexico and China citing trade deficits; threats from illegal immigrants and drugs flowing into the country as a reason for concern. Investors anxiety was palpable before the inauguration ceremony on January 20th with speculations rife on which executive orders might get signed on the first day. However, the anxiety waned on the news that the President has chosen to ask federal agencies to investigate on the trade policies and report back by April 1st. This gave hope to investors that perhaps sensible choices will prevail and therefore measures might be less arduous than previously expected. This optimism proved short lived as towards the end of the month, the White House confirmed the intent to implement 25% tariffs on all imports from Canada and Mexico; 10% tariff on energy imports form Canada; and 10% additional tariffs on imports from China.

The markets suffered another jolt during the month after a Chinese Artificial Intelligence start up company, DeepSeek, announced results of its AI models that produced better results than current LLMs (Large Language Models) and stated that the cost to train these models was at a fraction of a cost to train the current mainstream models. This raised the question whether the current spend on AI infrastructure is overdone. However, the market tremors due the start of tariff wars and advancements in Artificial Intelligence Technology in China also did not last long as tariffs on Canada and Mexico were put on hold for 30 days after the initial talks. Further, during the earnings calls of the big technology companies, forward looking guidance suggested the capital expenditure plans to scale up the Artificial Intelligence infrastructure have increased rather than decrease.

We think uncertainty in the broader markets is likely to continue as news flow remains erratic around tariffs and trade war. Speculations around the end game of the Trump Administration to upend the existing international trade and relations will likely keep investors on the edge. While the greater border control as a desired outcome from Mexico and reducing the flow of Fentanyl precursors from China seem plausible reasons to play hardball; the same arguments appear weak with respect to Canada. Is the goal to just stem the flow of illegal immigrants and drugs or is it to put the negotiating parties on defensive before the negotiations of USMCA (erstwhile NAFTA) begin in 2026? Are the tariffs being implemented with an end goal of forcing the companies to manufacture more in the United States? Or is the end goal even more sinister such as weakening Canada to an extent that annexation by the United States appears to be a better choice?

As of now, there are more questions than answers and the story continue to evolve with each passing day. That said, all or any of the above in any mix will have a varying degree of impact on the inflation and growth expectations and thus the capital markets. Trade wars are inflationary and uncertain outlook on inflation complicates the task for the Central Banks in 2025, in our opinion.

The economic data has stayed strong with the Personal Consumption Index (Feds preferred measure of inflation) in line with expectations (+2.6% headline and +2.8% core for the month of December) and unemployment edging down to +4.0% in January from +4.1% in December in the United States. The headline inflation in Canada was also lower-than-expected at +1.8% in December (down from +1.9% in November) and unemployment dropped from +6.7% in December to +6.6% in January. We think the economic data and robust guidance from corporates continues to support the case for constructive outlook on markets. That said, erratic news flow around tariffs will keep the market price action choppy.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc.