5 • 4 • 3 | High economic uncertainty

Hello everyone. Today, March 6, we're going to try to assess in just a few minutes a rather complex and constantly changing economic backdrop and what this could all mean for markets going forward. 

And to start with, I think it's important to understand that according to some indicators, we are actually facing the highest degree of uncertainty from an economic standpoint, economic policy standpoint for at least the past 25 years. So, we shouldn't be surprised to see equity markets’ volatility pick up against such an uncertain backdrop as markets try to assess what is the ultimate outcome and setting in terms of tariffs policy coming from south of the border. 

But as you can see here, the reaction is anything but exaggerated, so far, relatively muted, although we have seen indeed a pickup in volatility, maybe because markets have been conditioned not to overreact to uncertainty after a decade that has seen its fair share of historical events. But nonetheless, for the S&P 500 U.S. equity market, this marks a substantial shift in mood and sentiment compared to the optimism that prevailed following the last presidential election, the equity market now being slightly negative since the start of the year. 

And everybody's trying to assess where this may be headed going forward. But one thing is clear. If you take a big step back and look back at the last few weeks and months, that is the importance of diversification, which holds true when you think in terms of trading between countries, but definitely true when they think in terms of portfolio management.

And case in point, if you actually take a globally diversified equity portfolio in Canadian dollars, as you can see here, indeed there's slight gains still here today, large part due to substantial rebound in equity markets in Europe. But most importantly here you see that the path has been much narrower, much less volatile given these diversification effects. One very important being the impact of the Canadian dollar by depreciating helps returns when you bring them back home. So, diversification is somewhat working within equities and also working across asset classes with bonds having a rather good start to the year in the face of concerns over global growth, such that if you look at a very plain vanilla 60%-40% balanced portfolio, again, you see quite a narrow path in terms of volatility and very little damage so far in 2025.

Now, I want to be clear here, we've got to be cautious because there's definitely downside potential when you look ahead. And to give specific numbers here, the Bank of Canada actually tried to assess what could be the impact on our economy in the broad, a very extreme global trade war scenario. And the takeaway here is it's not a scenario that looks like anything like the [2008] global financial crisis or the pandemic but nonetheless could halt essentially growth in Canada in 2025 and ultimately create some problems for inflation as well.

But if there's one thing clear here though from the last few months, it's that the U.S. economy is anything but immune from a tariff shock, again being self-inflicted here by its own government. And specifically, we've actually seen a bit like the stock market consumer sentiment, which initially picked up post-election, now reversing course and coming down over the past two weeks, which definitely reflects concerns over inflation in the face of uncertainty about tariffs, consumer inflation expectations and that very survey usually don't move all that much, but have recently reached their highest level in in 20 years. So, this is something that we must keep a close eye on over the coming months because again, the U.S. economy may not be very much export-led, but it's definitely consumer-led. So that is very important.

Three takeaways for today. Again, there is a tremendous amount of uncertainty, which for now, markets have been essentially holding their breath, waiting some clarity as to how this all going to be evolving and what will be the ultimate impact on the economy. Technically, there's definitely downside risk for growth, especially in a country like Canada, but there's also upside for inflation in the U.S. So, we'll have to see how this all plays out. And in terms of markets, this means that we are likely going to be facing substantial volatility as we have seen since the start of the year, but maybe even more so going forward as we see these effects in the economy. And as such, we think that the mindset that investors should have against such an uncertain backdrop is ome focused on the diversification, which has worked again since the start of the year, much more than one, very much focused on any specific views one may have on a U.S. president that again here, is very unpredictable.

That's it for today. Thank you for listening and we will talk again in June.