Summer 2025 Market Update
In the second quarter of 2025, U.S. equity markets exhibited a remarkable recovery following the sharp “tariff shock” decline in early April, when the S&P 500 and Nasdaq fell into correction territory (> -10%) amid tariff escalations under the Trump administration (more on that later). By mid‑May, the S&P 500 had rebounded past its level from the start of the year and was just shy of February highs. Strong earnings from tech giants like Microsoft and Meta, coupled with easing U.S.–China trade tensions, improved investor outlook. However, investors seemed increasingly willing to “buy the dip” and that equity markets had suffered when new tariff policies were announced. This was mostly due to a recently coined acronym – TACO – or “Trump Always Chickens Out”, in relation to his consistent pause or reduction of tariff policy announcements. Meanwhile, U.S. fixed income markets held steady – the U.S. Aggregate Bond Index rose roughly 2.8% in Q1 and continued to offer modest returns, with 10‑year Treasury yields back near 4.2%by quarter’s end.
Canada’s S&P/TSX Composite saw a strong second quarter, gaining nearly 16% since bottoming in April and peaking at all‑time highs, outpacing U.S. markets. Commodity strength (especially in gold and base metals) alongside strong earnings from Canadian banks, helped push the index higher. However, rising U.S. tariffs on steel, aluminum, and auto exports clouded investor optimism, with economists warning that Canadian GDP growth might slow and unemployment had reached around 6.9% in April. Canada’s bond markets performed well during this time. Government and corporate bonds posted modest gains, despite rising 10-year yields in response to record fiscal debt issuance and delayed budget announcements.
On the macro front, U.S. consumer inflation softened, supporting a cautious Fed outlook as they continue to weigh interest rate decisions. In Canada, inflation cooled but core pressures lingered, prompting the Bank of Canada to pause after modest rate cuts and sustain overnight rates near 2.75%. Simultaneously, the Bank of Canada expanded bond supply for further financial flexibility.
Overall, Q2 reflected resilient equity recoveries, steady bond returns, and cautious macroeconomic optimism. The belief of many is that uncertainty created by recent U.S. administration policies overshadowed the ebbs and flows of economic data during this time.
Liberation Day or Liquidation Day?
In early April, President Donald Trump unveiled his “Liberation Day” tariff policy, a sweeping trade initiative aimed at correcting what his administration described as “persistent unfair trade practices disadvantaging American businesses and workers.” The centerpiece of this policy was a universal 10% tariff imposed on all imported goods, coupled with significantly higher tariffs – mostly ranging from 11% to 50% – on imports from countries with substantial trade deficits with the United States. China, in particular, faced escalating tariffs reaching as high as 145%, intensifying an already strained trade relationship. The goals of the policy were clear: to promote domestic manufacturing, address trade imbalances, and counteract practices like currency manipulation and foreign value-added taxes that have historically hurt U.S. exporters.
The announcement triggered immediate market turmoil –resulting in traders dubbing the announcement “Liquidation Day.” Major U.S. stock indices, including the S&P 500 and the Dow Jones Industrial Average, suffered sharp declines, with one of the steepest selloffs in recent history occurring on the day of the announcement. Although markets partially rebounded when the administration paused most tariffs for a 90-day period, investor uncertainty persisted, contributing to ongoing volatility. Financial experts warned that such tariff escalations could disrupt global supply chains, increase inflationary pressures, and potentially slow economic growth. The Congressional Budget Office estimated that the tariffs might reduce U.S. GDP by around 6% in the long run and lower wages by up to 5%, with significant impacts on middle-income households.
Justifying Tariffs – and Who Pays for Them?
Notwithstanding the 90-day pause on tariff’s, one of the main concerns for Canadians is the long-term impact of tariffs and Canada’s trade relationship with the U.S. In particular, the Trump Administration is justifying its tariffs on Canadian steel and aluminum, citing the need to bolster domestic production in key industries and reduce their trade deficit.
So, who pays for the tariffs? In theory, the importer pays for the tariffs. So, using the example of U.S. tariffs on Canadian goods, this means that the U.S. importer needs to pay the additional tax on Canadian goods and services being imported in. There are a few ways that this could happen – the importer absorbs the tariff themselves (leads to lower margins for the importer), they pass on the tariff to the consumer (increased prices for consumer goods and services), or they negotiate lower prices with the exporter (leads to lower margins for the exporter). It typically ends up being a combination of all three. Regardless, the Trump Administration’s theory is that this will force industries to invest more in domestic production and buy/build locally.
However, what may be overlooked in some aspects of the sweeping tariffs is the ability for the U.S. to increase its production on certain commodities/services in a short period of time. The risk of not being able to replace production in the short-term is potentially increased inflation on products and services, not just in the U.S. but globally. Keep in mind that most trading partners with the U.S. have introduced reciprocal tariffs on U.S. good and services.
Using Canadian steel and aluminum as an example, the U.S. relies on 25% of their steel demand to come from abroad. Canada and Mexico alone are responsible for almost 40% of U.S. steel imports. In addition, nearly 50% of aluminum demand in the U.S. is supplied from foreign trade partners, with Canada being the biggest contributor by far (see chart below).
According to the U.S. Aluminum Association, producing a single ton of aluminum requires 14,821 kilowatt-hours of electricity. To put this in perspective, a modern smelter with an annual capacity of 750,000 tons uses as much electricity as a city the size of Boston. In 2000, there were twenty-three active smelters in the U.S.; today, only four remain[1].
So, if the current tariffs are imposed on aluminum imports in an effort to increase domestic production, then where does the excess aluminum production come from? And where does the additional power come from for the processing facilities?
One could speculate that these are just a few examples as to why the Trump Administration has paused the sweeping tariffs in many industries. It seems Trump’s eagerness to rebuild “Fortress America,” was done in a precipitous manner.
[1] “Why tariffs are unlikely to bring back U.S. aluminum production” – Globe & Mail, May 6th,2025
Stay the Course!
With all that doom and gloom, many clients expected to see significant negative investment returns when they opened their April statements. However, for most clients that was not the case. As the Trump Administration backed away from the implementation of their trade policies, the markets began a dramatic turnaround.
These developments underscored the importance of maintaining a disciplined, long-term approach to portfolio management – especially in times of heightened market volatility. Here are some key strategies to consider:
- · Stay Focused on Long-Term Goals: Short-term market fluctuations can be unsettling, but history shows that markets tend to recover over time. Keeping your investment horizon in mind helps avoid impulsive decisions based on temporary events.
- · Diversify Your Portfolio: A well-diversified portfolio across various asset classes and geographic regions can reduce the impact of tariffs and trade disputes on your overall investments.
- · Avoid Market Timing: Trying to predict market moves in response to geopolitical events or policy changes is notoriously difficult. Consistent investing through dollar-cost averaging can mitigate the risks of entering or exiting the market at the wrong time.
- · Review Risk Tolerance: Volatile periods are a good time to reassess your risk tolerance and ensure your portfolio aligns with your comfort level and financial goals.
- · Consult with Your Financial Advisor: Our team can help interpret how such macro economic policies might affect your specific investments and recommend adjustments tailored to your situation
While tariff policies like “Liberation Day” can introduce uncertainty, maintaining a thoughtful, patient approach to investing often proves the most effective way to weather market storms and work toward your financial objectives.
Understanding the Difference Between My CRA Account and My Service Canada Account
For Canadians managing their finances and government benefits, understanding the distinction between the Government of Canada’s My CRA Account and My Service Canada Account is essential. While both provide secure online access to important personal information, they serve different purposes and cover different areas of your financial and government-related affairs. The potential for another Canada Post strike is another reason to have access too and understand the differences between your CRA account and Service Canada account.
My CRA Account is the Canada Revenue Agency’s online portal designed primarily for tax-related services. Through My CRA Account, you can view and manage your tax returns, check your Notice of Assessment, track your RRSP and TFSA contribution room, view and apply for benefits such as the Canada Child Benefit (CCB) and GST/HST credits, and make payments toward your taxes. It offers a comprehensive overview of your tax status and benefits administered by the CRA, making it a crucial tool for staying on top of your tax affairs.
In contrast, My Service Canada Account focuses on employment insurance (EI), pension, and social benefits managed by Service Canada. Through this account, you can apply for and manage Employment Insurance benefits, track the status of your application, view your Canada Pension Plan (CPP) contributions, and access information about Old Age Security (OAS). It also provides access to your Social Insurance Number (SIN) information and allows you to update your personal details with Service Canada.
In summary, while My CRA Account is your go-to portal for tax information and benefits managed by the Canada Revenue Agency, My Service Canada Account handles your employment, pension, and social benefits with Service Canada. Using both accounts ensures you have comprehensive access to your financial and government-related information in one secure place.