Tariff-ying times!

The North American capital markets witnessed a tumultuous month. Investor expectations switched back and forth between hopes of a de-escalation of the trade war threats to concerns of worsening global trade as the Trump administration continues to upend the United States’ relations with its global trade partners. The hopes of ‘Trump Put’, an expectation that the United States President will back-pedal on escalations to alleviate investors concerns in the event markets nosedive, have also faded. Most recently, Trump and several of his cabinet members have indicated that they are not looking at the stock markets. The US President in the joint address to Congress said that he expects some initial pain after the tariffs. Treasury Secretary, Scott Bessent, also stated in an interview that the United States economy will go through a ‘detox period’. In other words, the new administration seems prepared to go through pain to achieve its objectives.

We believe the above statements exacerbated the already battered investor confidence and concerns gave way to despair, judging by the market price action for the past few days. From expectations of the United States economy to outperform the rest of the world on the back of business-friendly policies like lower taxes and deregulation, the outlook has changed dramatically to an economic deceleration or perhaps even an engineered recession in the United States. The back and forth on tariffs, upending of relationships with allies/friends, supporting the position of enemies in international arenas,  and job cuts of federal workers in the name of reducing wasteful expenditure, have all contributed to an environment of uncertainty in the United States and allied countries. The United States economic policy uncertainty index is now at levels last seen during the ‘Great Financial Crisis’ of 2008-2009 and the ‘Covid-19’ pandemic in 2020 (See Figure 1). As businesses postpone decision making during uncertain periods, the natural fallout is economic contraction, rise in unemployment and ultimately a recession if the uncertainty continues to linger.

Figure 1: US Economic Policy Uncertainty Index

Source: Bloomberg

Judging from the recent comments of members of the Trump administration, we think the likelihood of uncertainty to linger longer has increased. The barrage of executive orders and attacks on mechanisms of potential check on Trump administrations’ actions suggests it could be a while before a meaningful opposition to the damaging actions can be staged, in our opinion. On the brighter side, the Federal Reserve’s chair, Jerome Powell, has not raised the investors hopes of monetary policy support yet. Any positive surprise on this front could help the market sentiment, in our view. In addition, the crisis created in Canada due to tariffs has now galvanized enough support to direct the nation’s energies towards self-sufficiency. While tariffs will be a negative for Canada, the developments have set things in motion for decisions that could serve the country better in the long run. Similarly, for the United States, the things are now set in motion that will reduce its importance and power on the global stage in the long run given its new image of being an unreliable partner. The western world is fractured right now and is scrambling to find alternatives to the global roles the United States has abandoned. The silver lining is that this necessitates a lot of capital expenditure towards critical minerals, defense, energy and technological sufficiency by these countries, which in turn implies new opportunities for investors.

We think the near-term headwinds for the global markets have increased and thus warrant a tactical defensive tilt to the investment portfolios. Furthermore, diversification to global geographies and different asset classes is a must to mitigate the downside risk in this environment. Nevertheless, the investment environment can change quickly if the United States shifts its position towards damage control rather then pressing on with the damaging policies. Overall, our optimism on the outlook for 2025 is tempered, however, we think the second half of 2025 should be relatively better. This could either be due to capitulation of Trump administration (reversal of some of the policies) to adverse market reaction and/or stalling of its actions as opposition finally finds it footing and stages a push back.

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.