Weekly Market Commentary April 8th, 2025

Canada’s Economy Staring at Recession

The Canadian economy is on the cusp of recession. After a solid start to the New Year, the economy is starting to crumble amid the impact of trade tariffs spearheaded by U.S. President Donald Trump. Data from Statistics Canada indicate that the gross domestic product was unchanged in February after growing by 0.4% in January.

If the slowdown persisted in March, in the aftermath of Trump imposing a 25% tariff on Canadian imports, then the economy recorded an annualized 2.1% growth in the first quarter, slightly higher than the 2% that the Bank of Canada expected. Amid the growth, the prospect of the Canadian economy plunging into recession is high, as the U.S. president has indicated additional tariffs in the coming weeks.

Economists caution that external forces, such as a 25% tax on steel and aluminum, could cause growth to stall in the upcoming months. This could have a major impact on the economy, especially on Canada's core metal manufacturing sector. Analysts say export-related industries can face more pressure in the coming months.

Amid the trade spat, the new Canadian Prime Minister Mark Carney has indicated that the country’s old relationship with the U.S., based on integration of the economies, tight security and military cooperation, is over. According to Carney, Canada must reevaluate its economic connections with other countries in order to create an economy that Canadians can manage. Whether Canadians and Americans can have a robust trading relationship in the future is still up in the air. However, always keep in mind that politicians do change over time. President Trump and whoever our next Prime Minister may be will change in the future.

Given that Canada has already hit back with its set of tariffs on U.S. goods, and plans for additional tariffs as a retaliatory play, there is a higher risk of inflation rising above the recommended 3% range. That’s because the Canadian central bank has yet to indicate that it will conduct a rate cut at its next decision in April.

Tiff Macklem, the governor of the Bank of Canada, stated last week that the bank's ability to lower interest rates to spur the economy is constrained by the possibility of increased inflation brought on by a trade war. He stated that policymakers would look beyond temporary price increases and make sure Canadian people and companies expect price increases to normalize over time.

Nevertheless, as economic uncertainty rises, the Bank of Canada has signaled a change in its monetary policy stance. It just cut its policy rate to 2.75%, but based on the state of trade, it might make more changes. The financial markets are accounting for the potential for more rate reductions, in the event that economic data indicates a slowdown in growth.

Meanwhile, investors’ sentiments on Canadian equities have already taken a significant hit, amid growing concerns about an economic slowdown and the trade war with the U.S. Consequently, the country's main stock index is poised for a rare monthly loss of 3%, having pulled back from record highs amid weakness in various sectors.

The sell-off in the Toronto Stock Exchange has been fuelled by weakness in the technology stocks sector, as investors increasingly shun risky assets susceptible to tariffs that hurt the economy. The information technology sector plunged to its lowest level after a 2.6% loss in five months.

The Markets

Risk-on. Risk-off.

If you read the financial press, you may have seen the terms “risk-on” and “risk-off.” When investing, there is a risk-return spectrum. Stocks typically have higher risk and higher return potential than high-quality bonds. High- quality bonds have lower risk and lower return potential than stocks, although they typically have higher risk and higher return potential than cash.

In financial speak, investors are:

• Risk-on when they are excited about investing in stocks (and other types of assets that have higher risk profiles). “Risk-on environments can be carried by expanding corporate earnings, optimistic economic outlook, accommodative central bank policies, and speculation. As the market displays strong influential fundamentals, investors perceive less risk about the market and its outlook,” reported Adam Hayes for Investopedia. A risk-on environment may lead to rising stock prices.
• Risk-off when they become cautious and concerned about losses. Risk-averse investors may sell some types of stocks (and other types of assets that have higher risk profiles) in favour of dividend-paying stocks and more stable types of investments that can help preserve principal. Risk-off environments may arise when economic growth slows, economic uncertainty rises, company earnings slide lower, consumer confidence wavers, or financial markets experience other kinds of disruptions. A risk-off environment may lead to falling stock prices.

Last week, investors moved from a risk-on to a risk-off outlook. The change in attitude resulted from concerns about:

• Tariffs. Concerns about tariffs intensified last week when “An unexpected move against car imports this week renewed warnings from economists that tariffs will almost surely raise consumer prices and harm economic growth,” reported Jeran Wittenstein and Ryan Vlastelica of Bloomberg.
• Sticky inflation. Last week, the personal consumption expenditures (PCE) index, which is one of the Federal Reserve’s preferred inflation gauges, showed that headline inflation remained steady month to month and year to year. However, core inflation, which excludes food and energy prices, rose month to month and year to year.
• Consumer sentiment. The final reading for consumer sentiment in March did not improve. “This month’s decline reflects a clear consensus across all demographic and political affiliations; Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment, and inflation,” wrote University of Michigan Surveys of Consumers Director Joanne Hsu.

During periods of market volatility, it’s important to keep a long-term perspective. Having an asset allocation strategy that reflects your risk tolerance and financial goals helps insulate your assets from market turbulence. Asset allocation helps manage risk, but it does not prevent losses.

Last week, major U.S. stock indices moved lower. Yields on U.S. Treasuries were mixed.

Source: FactSet

The Silver Lining Of Market Downturns.

Volatile markets are challenging. Watching the value of your assets bounce higher and lower can be frustrating. In times like these, it can be helpful to focus on the opportunities that can be created by market volatility. One of those opportunities is tax-loss harvesting.

Investors “harvest” tax losses by selling an asset for less than they purchased it. Unfortunately, not every investment delivers stellar returns. Almost every investor has owned an asset that loses value due to either company underperformance or a market downturn. When the asset is sold at a lower value than its purchase price, the investor realizes a capital loss.

From a tax perspective, losses are quite valuable. They can help:

1. Minimize capital gains Capital losses can be used to offset capital gains, dollar for dollar. For example, if an investor sells shares of Company A for a gain of $1 and sells shares of Company B for a loss of $1, then the loss offsets the gain.

2. Reduce taxable income When tax losses aren’t used to offset gains, the losses can reduce taxable income by up to $3,000. So, if an investor has a capital loss of $6,000 and a capital gain of $3,000, the capital loss could offset the capital gain and the $3,000 loss that is leftover could be used to reduce the investor’s taxable income.

3. Reduce capital gains and taxable income tomorrow. When capital losses are greater than capital gains and income reductions combined, the extra losses can be carried forward and used to offset capital gains and taxable income in the future.

The key to tax loss harvesting is that the money from the asset sale must be invested in a new opportunity – perhaps capitalizing on the chance to invest in a strong company at an attractive price, which is another benefit of market downturns. In general, the new investment should fill a similar role in the investor’s asset allocation strategy to the investment that was sold.

The silver lining of market downturns is that investment losses can be tax wins.

Weekly Focus – Think About It

“Courage is the price that life exacts for granting peace.”

– Amelia Earhart, Aviation pioneer

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.