Spring 2025 Market Update
The start of 2025 has been marked by notable volatility in the financial markets, influenced by various economic and geopolitical factors. The reintroduction of aggressive tariff policies by President Trump has led to uncertainty in global trade relations. These measures have particularly impacted sectors like technology and manufacturing.
Given this uncertainty, concerns about a potential economic slowdown have grown, not only in Canada but in the U.S. as well. This is most evident in the financial markets as major North American indices have declined since reaching new highs in January. This underscores the forward-looking nature of financial markets, as they often price in a potential recession, months in advance.
Putting the Markets in Perspective
IMPACT OF TRADE TARIFFS
While the Bank of Canada has indicated that current tariff threats imposed on Canada will cause an economic slowdown, the magnitude is still very much up for debate. The impact depends heavily on what tariffs are actually implemented, as well as retaliatory action by the Canadian government and potential supportive fiscal stimulus or other measures to support the local economy.
Notwithstanding strengthening ties with international trading partners, we have seen further
interest rate cuts, the elimination of the carbon tax, and the harmonization of regulations across provinces and territories to enhance internal trade. Moreover, let’s not forget that the economy doesn’t always react as one might expect. Periods such as these, where the market is attempting to hash out what the actual impact to companies and the economy will be, can present a buying opportunity in the markets.
TARIFFS ARE PRIMARILY A TOOL TO GAIN CONCESSIONS
The first Trump Administration imposed tariffs during the renegotiation of NAFTA (now called USMCA). Undoubtedly, this time we are dealing with a more aggressive version of the Trump Administration. However, during Trump’s first term, the U.S. budget deficit was only 3.5% of GDP, half of what it is today (7% of GDP). This has been deemed a major constraint for one of Trump’s main goals, which is to reduce corporate tax rates. If they want to reduce tax rates and eliminate the deficit, something will have to give.
It would therefore be logical to assume that the current tariffs will not be the permanent tariffs, as foreign investment will still need to serve as an important source of government revenue. Further, the logic of the U.S. Administration trying to make America nearly 100% self-sustaining in the areas of oil production, auto-manufacturing and technology, is not attainable in just 4 years. All these industries require significant time and capital investment to shift production.
As an example, the U.S. trade deficit with Canada would in fact be a surplus if one were to remove Canadian oil exports. Americans buy almost 4-million barrels a day, or around 60% of their total oil imports, from Canadian producers. A good portion of this oil is refined in the American mid-west, where the refineries are designed for Canadian heavy crude oil, not American light oil. The retooling of these refineries would take years, not months.
IF HISTORY IS ANY GUIDE…
If we look back to the last trade war, Canadian bonds and the U.S. dollar posted marginal gains, while the U.S. stock market declined. However, by the end of the trade war (2020), North American stock markets managed to deliver annualized gains of 5-7%.
North American markets have set new all-time highs recently, and there’s renewed concern around rising inflation, especially in the U.S. This creates a different financial landscape this time around. However, one thing is certain – it’s in situations like these that diversification in
your investment portfolio becomes critical. A proper fixed income allocation, as well as an allocation to international markets, can play a key role in your account’s performance during these uncertain times. While major Canadian and U.S. indices have seen declines year-to-date, international and fixed income markets have seen impressive gains to start the year. By reducing our home country bias and investing with a global perspective, we can improve our investment returns. It’s often said in investing that diversification is the only true free lunch!
What is a Dividend Reinvestment Plan (DRIP)?
A dividend reinvestment plan (DRIP) is a program that allows investors to automatically reinvest their cash dividends from investments. The cash dividends are used to automatically purchase more shares (or units) of the investment that paid out the dividend. There is no cost in doing this.
Most investment positions within your investment portfolio are set up for a DRIP. In accounts where a client does not require income, it becomes an ideal way for investors to take advantage of compounding returns over time. In fact, DRIPs are set up as a default in most situations, with cash dividends available for clients who need the income.
Here is an example of how a DRIP works:
A client invests $10,000 in an investment that pays a 5% dividend annually to its shareholders in March, June, September and December (1.25% per quarter). In this example, assume the price per share stays the same for the full year.
March – 100 shares @ $100 per share ($10,000) @ 1.25% = $125
- $125 is reinvested and client receives 1.25 additional shares
June – 101.25 shares @ $100 per share ($10,125) @ 1.25% dividend = $126.56
- $126.56 is reinvested and client receives 1.2656 additional shares
September – 102.5156 shares @ $100 ($10,251.56) @ 1.25% dividend = $128.14
- $128.14 is reinvested and client receives 1.2814 additional shares
December – 103.7970 shares @ $100 ($10,379.70) @ 1.25% dividend = $129.75
- $129.75 is reinvested and client receives 1.2975 additional shares
The client now owns 105.10 shares. This example assumes a flat stock price for the whole year, but if you assume the value of the stock goes up in that time frame, the compound growth of the DRIP becomes significant. It also becomes an effective strategy when the stock price moves lower, as you are effectively dollar-cost averaging at a lower price on a consistent basis.