January 2025 Strategy Notes

President Donald Trump’s new favourite t-word isn’t his own name – it’s ‘tariffs’. It’s a small word that has huge implications across the world, and especially to Canada. The tariffs came into effect on Saturday, Feb. 1; how it fully manifests itself and how it impacts markets is the key question, and we won’t really know until we know. Financial markets dislike uncertainty, and indeed we’ve had a very volatile first month of 2025 despite all indices set to finish the month approximately 3% to 4.5% higher.

Earnings quality continues to be good, but as hinted earlier the same geopolitical and inflation risks remain. The Bank of Canada cut its key interest rate another 0.25% on January 29, in preparation of new U.S. tariffs that could cut Canadian growth but also to further inspire a sluggish Canadian economy, which prompted the TSX to jump the following day. Meanwhile, the U.S. held their rates steady given their expanding economy and low unemployment rates, despite their inflation rate being above target.

Our dividend and income portfolios continue to chug along. We are cognizant of the effects U.S. tariffs may have on the Canadian markets and continue to make adjustments in our portfolios to stay away from the riskier sectors that may be affected by the tariffs, trim from positions that we feel are overweight or whose prices no longer seem sustainable, and invest in areas that provide a reasonable return relative to risk. Interest rate cuts have lowered bond yields, and our strategy remains to ladder bonds to ride out interest rate volatility and to ensure our clients have a more predictable stream of income.

As February and March approach, please note that tax season is upon us. A reminder that this year’s deadline for RRSP contributions is Monday, March 3, 2025 and the TFSA contribution limit for 2025 is $7,000.

Tax documents for 2024 tax year will be available for download by the end of February through our online client portal: https://leede.ca/login/

Further Reading:

According to BMO Economics, a “… permanent 25% tariff on all U.S. trading partners, with full retaliation… estimate a 2.4 ppt hit to Canadian growth in year one and a 1.5 ppt hit in year two” with the caveat that no one really knows how things will turn out until the tariffs are implemented. The research also notes that the Bank of Canada’s toughest scenarios indicate a potential modest recession, but not close to the 5% annual decline during the pandemic or the decline during the global financial crisis. In other words, the “pandemic-like” response that has been bandied about feels overblown, teetering closer to fearmongering for political gain rather than level-headed logical reason.

A ”pandemic-like” response suggests economic relief; the more appropriate response is to find ways to facilitate economic growth through investment and productivity. Increased capital investments, infrastructure building and tax relief are appropriate responses to U.S. tariffs.

(As a side note, it is absolutely asinine that the proposed $250,000 inclusion rate in capital gains tax is assumed to have taken effect in June 2024 by the CRA despite the fact it is not yet law, which has created confusion and lawsuits and become a political football, only to have its effective date moved to Jan. 1, 2026, and have Finance Minister Dominic LeBlanc say it provides “certainty” to Canadian taxpayers).