Weekly Market Commentary April 14 2025

Canada Recession Warning

Canada’s economy is on the brink of recession, as U.S. President Donald Trump's tariffs exert unnecessary pressure on various sectors. The economy has already started shedding jobs, as the outlook among businesses and consumers remains bleak. Recession talk has gathered momentum recently, despite the country being spared some of the worst tariffs levied against other U.S. trading partners.

Canadian Prime Minister Mark Carney has warned that the country may experience indirect repercussions from Trump’s policies. According to Carney, the likelihood of a U.S. recession has increased significantly, which could diminish the demand for Canadian products, fuelling a recession up north as well.

Since Trump took office, he has imposed 25% tariffs on automobiles, steel, and aluminium, while also targeting billions in Canadian goods that are excluded from the Mexico-Canada trade agreement. The impact of these tariffs and the anxiety over potential additional tariffs have already taken a toll on the Canadian economy. According to Canada’s statistical agency, March saw a loss of 33,000 jobs, marking the worst employment report in over three years.

The Bank of Canada has indicated that both businesses and households anticipate rising inflation, with company leaders warning they plan to transfer the increased costs from tariffs to consumers, irrespective of the effect on consumer demand.

The central bank’s business outlook survey for the first quarter revealed that 32% of Canadian firms are now preparing for a recession within the next year, which is more than double the average of 15% reported in the latter half of 2024. Hiring intentions among business proprietors are currently stalled, as indicated by the central bank, and consumer confidence in the job market has declined. Additionally, investment plans among business leaders have also worsened.

Canada's fiscal and monetary forecast has been further complicated by the government’s choice to retaliate against the U.S. Last week, Carney announced that Canada would impose matching 25% tariffs on American vehicles that are not covered by the USMCA, potentially increasing prices on 67,000 cars. This tariff is the latest in a series of retaliatory measures from Canada, which has already enacted 25% tariffs on more than $40 billion worth of American products entering the country.

Meanwhile, the selloff in the equity markets picked up early in the week from where it left last week. Having lost more than 10% from record highs, Canada's main stock index, the Toronto Stock Exchange, shed nearly 2.5% om Monday as President Trump continued triggering market volatility.

While Canadian stocks are deep in the corrections phase, they continue to outperform their counterparts down south. Nevertheless, Canadian stocks hold relatively well as companies embrace tariffs and the uncertainty triggered by the trade war.

The Markets

“If you can keep your head when all about you are losing theirs…”

The advice offered by Rudyard Kipling’s poem, If—, resonated last week. A sharp escalation in trade tensions sparked a stock market downturn, despite news that the United States economy created far more jobs in March than economists had expected, reported Lucia Mutikani of Reuters.

Late Wednesday, President Trump announced tariffs on countries around the world. The tariffs were significantly larger than anticipated, and stock markets immediately moved lower. Over two days, the Standard & Poor’s (S&P) 500 Index lost about $5 trillion in market capitalization, reported Lynn Thomasson of Bloomberg.

It was the “largest decline for stocks listed on major U.S. exchanges since March 16, 2020, when $3.5 trillion in value was wiped out, according to Dow Jones Market Data,” reported Connor Smith of Barron’s. (March 2020 was when the COVID-19 outbreak officially became a pandemic.)

In contrast, government bonds rallied, as yields fell. Investors’ preference for lower risk assets “resulted in rising demand for government debt in the U.S., U.K., Germany, Japan and Australia — which sent yields down across all those countries,” reported Vivien Lou Chen of MarketWatch.

Three reasons for the stock market downturn

While tariffs were the catalyst for the market downturn, they weren’t the only reason for the decline. Other contributing factors included:

1. A tsunami of uncertainty. You’ve heard it before: Markets hate The new administration’s tariffs brought a tsunami of uncertainty. Some investors opted for safe havens as they awaited greater clarity around key questions, including:

• Are the tariffs a negotiating tool or a permanent tax?
• How will tariffs affect the outlook for economic growth?
• How will tariffs affect corporate profitability?
• How will other countries respond?

“The scope, speed and magnitude of the Trump administration’s tariff blitz left investors with a lot of questions. But one point came through crystal clear: The post–World War II global world economic order is no longer. That is forcing a reassessment by countries on how to respond and pushing investors to reassess long-held assumptions about profit margins, investments, and inflation,” reported Reshma Kapadia of Barron’s.

2. High market valuations. Over the past two-plus years, excitement about artificial intelligence, an economic soft landing, pro-business policies, and other factors have helped lift stock prices to extraordinary By many measures, U.S. stocks were expensive, which made them vulnerable to decline, reported Jacob Sonenshine of Barron’s. The imposition of extraordinary tariffs forced investors to reassess expectations for U.S. economic growth, corporate earnings, inflation, and share prices.

“Over the medium to longer term, Trump’s tariff and trade policy will likely accelerate the move to diversify supply chains, emphasize regionalization over globalization, and invest in becoming more self- reliant… But given the uncertainty and increasing costs of inputs, companies may rethink where they allocate long-term capital,” wrote Kapadia. “…’tariffs plus associated uncertainties provide more incentives to build around the U.S., not in the U.S.,’” stated to a source cited by Kapadia.

3. The tariff narrative. Narrative economics is a theory developed by Nobel Prize-winning economist Robert Its premise is that viral stories influence economic behaviour. As a result, viral narratives can influence markets. Shiller explained, “…whether it’s the belief that tech stocks can only go up, that housing prices never fall, or that some firms are too big to fail. Whether true or false, stories like these—transmitted by word of mouth, by the news media, and increasingly by social media—drive the economy by driving our decisions about how and where to invest, how much to spend and save, and more.”

Last week, a dominant narrative was that tariffs may cause a trade war, which could have unfavourable and long-lasting effects on the U.S. economy. “While trade wars don’t involve armies and bloodshed, some of the same rules apply—especially when it’s a war of choice. Strengths need to be assessed, allies cajoled, goals set, and preparations made. When done right, victory can be reached with relative ease and result in an increase in standing. When poorly planned, strengths turn into weakness, quick victories become battles of attrition, and unintended consequences can last for years,” reported Ben Levisohn of Barron’s.

By the end of the week, the technology-heavy Nasdaq Composite Index was in bear market territory, down more than 20% from its previous high. The Dow Jones Industrial Average had moved into correction territory, and the S&P 500 Index had experienced its worst week since 2020, reported Amalya Dubrovsky, Karen Friar, and Ines Ferré of Yahoo! Finance. Yields on longer maturities of U.S. Treasuries moved lower, pushing the value of previously issued Treasuries higher.

Stock market volatility is likely to continue as the tariff story plays out. While the tariff story plays out, it’s a good idea to stay calm and focus on your plan. Your portfolio allocation and diversification strategies were put in place to help you achieve your financial goals. Taking drastic action in response to a short-term market upheaval could affect your ability to reach those goals. If you have questions or would like to discuss recent events, please get in touch.

Source: FactSet

First Quarter Review: Changing Expectations

In late January, as the new administration took office, markets anticipated that proposed tariffs would create economic headwinds that could be offset by the positive effects of deregulation (a productivity boost) and tax cuts (economic stimulus), reported Ben Levisohn of Barron’s. By the end of the quarter, market expectations had changed dramatically.

“The highest-conviction trades coming into 2025 – buy U.S. exceptionalism and the Mag 7, avoid the rest of the world, sell bonds – have been turned on their head. Chinese and German stocks are up by double digits since Jan. 20, while the U.S. – and notably information tech and consumer- discretionary stocks – is down since then,” reported Randall Forsyth of Barron’s.

A market rotation

Financial markets experienced a rotation during the first quarter, as market expectations shifted. Rotations occur when a dominant trend fades. Typically, investors sell investments that were in favour and buy assets that they believe are better opportunities, reported Sarah Hansen of Morningstar. During the first quarter of 2025, we saw sector, style, and regional rotations.

U.S. technology stocks lost their lustre. In the United States, the information technology, communication services, and consumer discretionary sectors – home to the Magnificent Seven – delivered stellar total returns in 2023 and 2024. However, their dominance faded in the first quarter of 2025, while more defensive sectors of the market delivered positive returns.

Value stocks came into favour. “Worries over historically elevated tech stock valuations, combined with a tariff-induced bout of risk avoidance, have driven the recent rotation from growth into value,” reported Esha Dey of Bloomberg. The S&P 500 Value Index was up 0.28% during the first quarter, while the S&P 500 Growth Index dropped 8.47%.

International stocks outperformed. “As the U.S. stock market lost ground in the quarter, international markets surged amid a global shift. Chinese markets gained 14.17 [%], while eurozone markets rose

12.24 [%], thanks in part to major fiscal initiatives designed to stimulate growth and enhance the region’s defense capabilities amid the ongoing conflict between Russia and Ukraine,” reported Sarah Hansen of Morningstar.

Rotations can be healthy. The key is “to focus on emerging leadership in other sectors demonstrating relative strength,” stated a source cited by Levisohn.

Weekly Focus – Think About It

“When I hear somebody sigh, ‘Life is hard,’ I am always tempted to ask, ‘Compared to what?'”

– Sydney J. Harris, Journalist

Best regards,

P.S. Please feel free to forward this commentary to family, friends or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.

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.