“I like making deals. Preferably big deals. That’s how I get my kicks.”
“Money was never a big motivation for me, except as a way to keep score. The real excitement is playing the game.”
Donald Trump, The Art of the Deal
On March 4, President Donald Trump followed through on his tariff threat against Canada by imposing a 10 per cent tariff on Canadian oil and gas and 25 per cent on all other Canadian exports to the U.S. In retaliation, Canada announced a 25 per cent tariff on targeted imports from the U.S. and an intention to extend tariffs on a wider assortment of U.S. products in three weeks. The Trump administration also initiated a 25 per cent tariff on imports from Mexico and further increased the tariff rate on Chinese imports by 10 per cent.
After sharp initial declines, equity, bond, and currency markets recovered most of the day’s weakness. The Canadian dollar, perhaps the best real-time barometer of the market’s interpretation of tariff risk to the Canadian economy, actually closed higher against the U.S. dollar and is flat year-to-date (YTD). At 4:30 p.m. on March 4, U.S. Commerce Secretary Howard Lutnick revealed in an interview that he had been communicating throughout the day with Canadian and Mexican counterparts and hinted at potential tariff relief coming as early as March 5.
Since Trump’s inauguration, the fear-greed pendulum has swung wildly.. Yet despite the headlines, Canada’s S&P/TSX Composite Index has declined a modest 0.6 per cent YTD, outperforming the U.S. S&P500’s -1.8 per cent YTD move (as of March 4 close; all data per Bloomberg). Equity markets of other current and prospective tariff targets, including Mexico, China, and Europe, have also outperformed the U.S.
We attribute these seemingly unusual moves to a few factors. First, and likely most important, markets remain skeptical that Trump’s tariffs on Canada will be permanent and are instead part of an early renegotiation process for the United States-Mexico-Canada Agreement (USMCA) on trade that is up for review in 2026. For the second time now, the tariff blade has been dangled above the Canadian economy, only to be removed or potentially reduced. Second, a high degree of negative sentiment may already be priced into ex-U.S. markets as evidenced by the wide valuation discount to the S&P 500. Finally, in the case of Canada, the market is aware of the myriad of levers that can be pulled to partially counter the effects of U.S. tariffs.
Nevertheless, we recognize the considerable strain that prolonged tariffs can impose on the Canadian economy. The risk of a recession in Canada was heightened before the tariff announcement; however, recent interest rate reductions have provided some relief. Prolonged tariffs are likely to result in slower economic growth, increased unemployment, higher inflation, and decreased consumer and business spending. As stewards of your investments, we acknowledge the increased risk of a recession and remain committed to navigating these challenges with prudence and care.
Throughout the post-U.S. election period, we have been careful not to overreact to the brinksmanship of the current U.S. administration. Disciplined changes to our managed portfolios reflect our preference for select U.S. equity sectors such as financials and technology, and durable Canadian franchises that we believe can weather near-term volatility. We have also been adding market neutral and international equity exposure.
Heightened uncertainty on tariffs and other U.S. policy positions have pushed markets into extreme fear territory (per CNN’s Fear and Greed Index). The latest American Association of Individual Investors’ weekly poll of retail investors revealed the highest level of bearishness since September 2022. In the past, these contrarian indicators have marked attractive entry points. As such, we have been rebalancing portfolios regularly by adding to positions that appear oversold.
We acknowledge that geopolitical uncertainty is driving market volatility and anxiety levels. We encourage you to contact us if you have any questions regarding your portfolio and our market outlook.
