Investment Report: Navigating Current Market Volatility

April 7, 2025

Executive Summary

The current financial landscape is marked by heightened uncertainty and volatility, primarily driven by aggressive trade policies and escalating tariff disputes. While these conditions present challenges, they also unveil strategic opportunities for well-prepared investors. With each of our partners bringing over 30 years of experience in navigating complex market cycles, we offer the following insights and strategic considerations.​

Market Overview

Recent developments have significantly impacted global markets:​

• Trade Tensions and Tariffs: The U.S. administration's implementation of sweeping tariffs has led to retaliatory measures from key trading partners, notably China. These actions have intensified fears of a global trade war, contributing to market declines. ​
• Economic Indicators: Leading financial institutions have adjusted their economic forecasts in response to these developments. Goldman Sachs, for example, has increased the 12-month recession probability from 35% to 45%, citing the potential economic fallout from the newly announced tariffs.

Strategic Positioning

We have been in anticipation of a market downturn for some time although exuberance over AI delayed the response to what we felt were some frothy market valuations. Our portfolios have had excess cash, and we took further proactive measures earlier this year by raising more.

• Increased Cash Reserves: Recognizing potential market disruptions, we strategically raised cash positions across portfolios. This decision enhances our flexibility to capitalize on emerging investment opportunities amidst current market dislocations.​

Investment Outlook

While the market's trajectory remains uncertain, several factors inform our perspective:

• Rebound Expectations: Unlike the swift recovery observed post-COVID-19, current conditions suggest a more measured market rebound. Historical analyses indicate that while the market invariably recovers, the duration and path can vary significantly. ​
• Policy Uncertainty: Ongoing shifts in trade and fiscal policies contribute to market unpredictability. Such uncertainty can influence business investments and consumer spending, potentially leading to economic slowdowns. ​

Strategic Recommendations

Our experience leads us to the play book we have utilized during past economic cycles and market volatility.

1. Selective Investment: Utilize available cash reserves to selectively invest in high-quality assets that have become undervalued due to market overreactions.​
2. Diversification: Ensure portfolios are well-diversified across sectors and geographies to mitigate risks associated with specific industries or regions affected by trade tensions.​
3. Long-Term Focus: Emphasize a long-term investment horizon, recognizing that while short-term market movements can be unpredictable, fundamental value tends to prevail over time.​

Conclusion

The current market environment presents both challenges and opportunities. Drawing upon our extensive experience, we remain committed to guiding our clients through these turbulent times with informed, strategic decisions aimed at preserving and enhancing long-term wealth.

1st Quarter 2025 Market Summary

The Bank of Canada’s balancing act

The Bank of Canada's mandate is to "promote the economic and financial welfare of Canada," primarily through maintaining a stable and predictable economy with low and stable inflation. American President Donald Trump has threatened, and enacted, 25 percent tariffs on key industries in Canada. This may cause prices to rise, and economic growth to falter. In anticipation, this year the Bank of Canada lowered the borrowing rate to 2.75%. The Bank’s governing council noted that the economy performed above expectations at the end of last year. They probably would have held the interest rate steady at 3.25% if not for the tariff uncertainty. They continue to monitor inflation.

Canadian dollar has fallen versus the U.S. dollar

Over the past year the Canadian dollar has lost 5 percent of its value versus the US dollar. Today’s CAD-USD exchange rate is 1.4301. There have been headlines musing that it could drop to 1.50, but a lot of water has to go under the bridge before that happens. The weaker Canadian dollar benefits export businesses by making Canadian goods more affordable for foreign buyers.  However, it also makes imports more expensive and increases the cost of travel for Canadians. 

Canada is now in election mode

Both Ontario and Canada called elections in the first quarter of 2025.  Ontario’s Premier Doug Ford was re-elected for the third term.  Mark Carney is the current Prime Minister of Canada following Justin Trudeau’s resignation at the beginning of the year.  A federal election has been called for April 28.

Effect on U.S. and Canadian Markets

At the end of last year, the outlook for the US economy was very positive! Market watchers were excited about the Trump effect. But today, forecasts have changed due to the announcements of tariffs on goods entering the United States. The US Federal Reserve Bank’s Gross Domestic Product (GDP) projection for 2025 was 1.7%. U.S. Federal Reserve Chairman Powell stated that the US economy faces a “highly uncertain outlook with elevated risks of both higher employment and higher inflation”.  US inflation rate is down from its highs – although in his interview with the Canadian Press, Anish Chopra cautioned that the inflation data is from before the U.S. began levying tariffs on Canadian goods, so market watchers will be taking the latest report with a grain of salt, he said. “I think it will take some time for this to clear up, to see what the trend is,” he said. “There’s just a lot of moving parts.” 

Canadian response so far

The positive effect of Trump’s effrontery has been a resurgence of Canadian Nationalism.  President Trump’s assertion that Canada should be the 51^st State has had a positive effect as Canada is waking up and realizing that there are more markets for our goods and services than the United States of America. Now there is a Shop Canadian app that encourages Canadian to support local businesses. Canadians are cancelling travel to the United States. Canada is engaging in trade talks with Europe. There is talk of removing the interprovincial trade barriers. Hopefully these actions add up positively for Canada and common sense will prevail in the United States. 

PMC continues to look long-term

This past year has shown that new variables can muddy the waters and make short term prognostications unreliable. While chaotic policy changes in the United States are dominating the news, the fact is the market is vulnerable mostly because valuations are stretched. PMC maintains a steadfast commitment to long-term investing, focusing on high-quality stocks with strong management and proven track records. Your portfolio is carefully structured to align with your individual risk-reward profile. We continuously evaluate new investment opportunities to enhance your portfolio and ensure its continued alignment with your long-term goals.

PMC in the NEWS 

1. Anish Chopra interview with Canadian Press: S&P/TSX composite ticks lower, U.S. stocks post small gain
2. Anish Chopra interview with Canadian Press: https://ca.finance.yahoo.com/news/tsx-slightly-u-markets-mixed-153026129.html

Client Question Corner

1. The markets are down sharply. What can I do?
• Ask yourself if you have a cash cushion for everyday expenses so that you are not forced to sell securities in a down market.
• Maintain a long-term perspective: Market fluctuations are inherent to investing. Historically, markets have demonstrated resilience, rebounding after periods of decline. It’s crucial to focus on long-term objectives rather than short-term market movements.

Commentary reflects the opinions of Portfolio Management Corporation (PMC) at the time of writing and may reference sources that PMC believes to be accurate and reliable. PMC does not guarantee the accuracy or completeness of such information, and our opinions and viewpoints may change over time. Forward-looking statements are based on historical events and trends and may differ from actual results.