February 2025 Strategy Notes

The S&P 500 returned 2.7% in January and dropped 1.4% in February in a volatile start to President Trump’s second term. On Monday, Trump reiterated his tariff policy and impose a 25% levy on Canadian and Mexican goods and signed an executive order to place an additional 10% tariff on Chinese goods; markets immediately sold off with major indices erasing early-morning gains and saw the Nasdaq drop approximately 2.5% and the Dow approximately 2% on Monday.

Markets were again hammered on Tuesday following Prime Minister Trudeau’s comments and then Trump’s threat to counter with more tariffs, but U.S. markets swiftly recovered only to close lower. It was a similar story for the rest of the week as markets gyrated with increased volatility and finished lower each day.

We expect this kind of volatility to continue. We noted in our previous newsletter volatility is here to stay, and we feel quite certain of that during these uncertain times. Inflation is also still not in the rearview mirror just yet. The tariff war is on-going with no real indication of when or how it may end, only that Trump remains insistent on putting them in place.

On the positive side: Not every sector has felt the brunt of the tariffs, stock market indices are still close to all-time highs and economies remain resilient, especially during the higher inflation periods. Our bond positions and dividend equity portfolios continue to generate a more predictable stream of income for our clients, providing a figurative dam to volatile waters. While the tariffs have affected Canadian and global markets in all sectors, our exposure to consumer staples, utilities and big banks puts us in a defensive position against potential market shocks, especially to the highly sensitive tech and high-growth stocks.

We have, and will continue to build cash positions, as part of our asset allocation strategy. With the sell-off, we are also keeping an eye on potential opportunities. While we may not necessarily be contrarian investors, we do see companies with good balance sheets and great assets whose stock prices are becoming more attractive.

Further Reading:

It could be tax cuts. Remember, the Tax Cuts and Jobs Act put into effect in 2018 is set to expire this year, and it can be surmised a goal of the Trump administration is to continue or expand the cuts to corporate taxes. Forgetting for a moment the reason for the tariffs was to stem the flow of illegal drugs to the U.S. – Canada and Mexico played ball in strengthening their borders, but the tariffs went through anyway – the tariffs are designed to help raise additional funds for the U.S. government to offset the corporate tax cuts. In other words, the U.S. government needs money, and rather than taxing corporations, they’re doing it through tariffs instead.

The costs of the tariffs may be passed onto consumers, at least partially, which will hurt margins and earnings growth as long as they stay in place. But, if tax cuts do come, it could offset those effects and provide a boost to earnings.

Trade wars do not last forever. It’s worth remembering the stock markets have braved through financial crises, world wars, global pandemics, and provided positive returns in most years.