Weekly Market Commentary February 28 2025

Canada Economy on Edge

Canada's economy is at a critical juncture as it deals with U.S. tariff threats. Bank of Canada Governor Tiff Macklem has already warned that a trade conflict could significantly impact the economy and monetary policy. A strategic policy shift to stabilize the economy in the face of external pressures is indicated by the Bank of Canada's openness about possible rate changes.

"In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened. This time, if tariffs are long-lasting and broad- based, there won't be a bounce-back. We may eventually regain our current rate of growth, but the level of output would be permanently lower. It's more than a shock — it's a structural change,” Macklem stated.

Over the past 60 years, trade between the United States and Canada has grown, with both nations serving as each other's top export destinations. Imposing high and permanent tariffs could result in a significant supply shock and a decline in demand. This would be comparable to the early stages of the pandemic.

Although Canada's economy recovered when the pandemic ended, there won't be a recovery this time. Eventually, the economy would grow again, albeit from a lower starting point. This is a change in structure. The

U.S. imposing a 25% tariff on Canadian exports would hurt growth prospects and increase inflation. That’s because Canadian goods would end up costing more, resulting in a drop in demand. Reduced demand would lead to layoffs and lower household incomes.

Similarly, Canada retaliating with its tariffs on U.S. imports would result in a spike in the cost of imports, resulting in reduced demand back at home. In the end, prices could spike, resulting in a significant increase in inflation.

It is anticipated that demand will decline faster than supply, if tariffs are implemented. Economic growth would suffer as a result. During this time, demand may be supported by lower interest rates. However, the need to control inflation limits the amount of support that monetary policy can offer.

While economic data has been disappointing in recent weeks, compounded by the risk of U.S. tariffs, there is a very high chance that the Bank of Canada will cut interest rates at its next meeting in March.

Nevertheless, the central bank will have to assess whether inflationary pressures are returning and how tariffs from the U.S. could affect the economy. Markets are pricing a 25 basis point rate cut in March.

Meanwhile, the broader Canadian stock market remains on edge after plunging to five-week lows last week. The decline came amid significant energy, metal, and technology losses. Commodity prices tanked significantly as the risk-off mood crept into the market. According to the chief market strategist at SIA Wealth Management, investors are no longer looking for reasons to buy but to sell in the markets.

While the TSX surged by 18% in 2024, it’s been under pressure recently. A 4.3% correction between December and January came, as investors reacted to President Donald's rhetoric of imposing significant tariffs on Canada. The tariff threat continues to cause uproar and stifle the stock market rally. While the market has gained about 3% year to date, the journey has been choppy due to the constant tariff threat.

Keep in mind that our overall exposure to the Canadian stock market is relatively low. Additionally, as part of our equity exposure, we have the Centurion Apartment REIT, which does not fluctuate like the Canadian stock market can.

The Markets

A difference of opinion.

Broadly speaking, there are two types of investors: individual investors and institutional investors.

Individual investors buy and sell investments to grow their personal wealth. This group of investors often works with financial advisors as they pursue their financial goals. Individual investors tend to invest small amounts of money than institutional investors do.

For the last three weeks, sentiment among individual investors has been leaning bearish. Last week, 40.5% of investors in the AAII Investor Sentiment Survey were feeling pessimistic about the direction of stocks over the next six months. That was an improvement from the prior week’s reading when 47.3% of participants were bearish. Here’s what the survey has found since the week of January 20.

The AAII Investor Sentiment Survey is considered a contrarian indicator, meaning that people look at the survey to identify potential turning points in the market. In some instances, when investors have been pessimistic, the market has moved higher, and vice versa, reported Edward Harrison of Bloomberg.

Institutional investors are very large investors, such as banks, mutual funds, exchange traded funds, college endowments, state pensions, insurance companies, and other organizations that buy and sell investments, usually in very large volumes, to meet the goals of the group for whom they’re investing.

Currently, institutional investors are quite bullish. According to survey results released last week by Bank of America (BofA), many institutional investors are fully invested and holding very little cash. “Global stocks have become the most popular asset class with [institutional] investors, who are showing the biggest willingness to take risk in 15 years,” reported Sagarika Jaisinghani of Bloomberg. “About 89 [%] of respondents in the BofA survey said U.S. equities were overvalued, the most since at least April 2001. The faith in so-called U.S. exceptionalism — where investors bet mainly on American financial markets — has also faltered as investors rotate into European stocks.”

Last week, major U.S. stock indices moved lower on discouraging economic data and inflation concerns, reported Connor Smith of Barron’s. The yield on the benchmark 10-year U.S. Treasury moved lower over the week.

Source: FactSet

Let’s Talk About The Weather.

Last week, many parts of the United States set new records for low temperatures as an Arctic blast swept across the country. Antelope Creek, North Dakota, saw 45 degrees below zero, which made the low in Austin, Texas (29 degrees) seem downright balmy. In many areas, schools closed – not because of snow, but because of the bitter cold. Meanwhile, up in Alaska, the Iditarod dog sled race moved north from Anchorage to Fairbanks due to a lack of snow and too-warm temperatures.

See what you know about historical weather events in the United States by taking this brief quiz:

1. What was the coldest temperature ever recorded in the United States?
   1. 80 degrees below zero in Prospect Creek, Alaska
   2. 70 degrees below zero in Rogers Pass, Montana
   3. 60 degrees below zero in Tower, Minnesota
   4. 45 degrees below zero in Minot, North Dakota
2. In 1974, the S. experienced the Super Tornado Outbreak. During the outbreak, two F5 tornadoes struck Tanner, Alabama, in the same 24-hour period. How many tornadoes occurred across the United States during the Outbreak?
   1. 47 across 7 states
   2. 98 across 25 states
   3. 148 across 13 states
   4. 247 across 21 states
3. In the early 1900s, steady rain caused a major river in the U.S. to overflow its banks. The floodwaters spread across 16 million acres in seven states. It “temporarily created a shallow sea over 75 miles wide and forced thousands to be evacuated by boat,” reported Evan Andrews of History.com. What is the name of the river that flooded?
   1. Ohio River
   2. Mississippi River
   3. Colorado River
   4. Platte River
4. In 2011, a massive dust storm encompassed Phoenix, The 6,000-foot-high wall of dust stretched more than 100 miles long and traveled 150 miles, reported Gabe Trujillo of Channel 12 News. What are these enormous dust storms called?
   1. Derechos
   2. Lizard stranglers
   3. Haboobs
   4. Drouths

By the end of last week, temperatures were warming up. In some places, temperature swings of 90 degrees or more were anticipated. That’s sure to inspire thoughts of spring blooming!

Weekly Focus – Think About It

“The beautiful spring came; and when Nature resumes her loveliness, the human soul is apt to revive also.”

– Harriet Ann Jacobs, Author

Best regards,

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Disclaimer:

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Eric Muir and Derek Lacroix and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.