Trumpworld

Like it or not, we are all now living in what can be called "Trumpworld." In this world—parallel until January 20, 2025, but very real ever since—several pillars of the world we took for granted are now threatened or have completely disappeared. American democracy, Pax Americana and NATO, the global economic order, based in particular on rules governing international trade built over decades. Politically, the United States has resolutely sided with what it itself called until recently the "axis of evil." The new world order is based on a very simple rule: the law of the strongest, militarily and economically.

The Dumbest Trade War in History

In addition to his desire to annex Canada and take possession of Greenland, the Panama Canal and the Gaza Strip (to turn it into a riviera!), the first manifestation of Trumpworld is the "stupidest tariff war in history "¹. As of today, Trump has imposed (and in some cases withdrawn and re-imposed!) import tariffs on Chinese products, as well as 25% on steel and aluminum and on cars. These 3 sectors are very important to the Canadian economy, particularly the automotive industry, which accounts for 11% of our exports to the U.S. and creates many jobs.

From a strictly economic point of view, the appropriate response from the Canadian government - apart from formal complaints to the World Trade Organization, of whose existence Trump must not even be aware - would be not to retaliate. Indeed, an import tariff is a tax that Canadian businesses and consumers will have to bear, at the very time when U.S. tariffs (if maintained) are likely to cause a recession in Canada.

From a political point of view, however, Canada and the other countries targeted by these attacks must fight back. We'll probably suffer more than the Americans, but they'll suffer too, and that's what counts. So we need to prepare for a world war...on tariffs.

We’ve Seen This Movie Before

A tariff war doesn't bode well for the economy, for corporate profits and for their listed shares. So far, the damage is rather limited and concentrated in US stocks, particularly those that had risen the most in the wake of Trump's election. Hopefully, someone will give Trump an Economics 101 lesson, he'll take a step back and the stock market will breathe a sigh of relief.

If Trump persists, however, history teaches us what a tariff war can lead to. Far be it from us to play prophet of doom - and we must be careful not to draw simplistic parallels between 2 different contexts - but a majority of economists agree that the last great tariff war, launched by President Herbert Hoover in the 1930s, contributed greatly to the Great Depression, which only ended with the Second World War.

And What About the Portfolio?

As mentioned earlier, the damage to the balanced portfolio is rather limited. In fact, a portfolio composed of 60% equities and 40% bonds is up 1.1% over the quarter and 11.9% over the past 12 months, before fees.

European equities did particularly well, and Canadian equities held their own despite Trump's frontal attack.

As is their role in turbulent times, bonds helped stabilize the portfolio.

For those interested in history, despite the tariff war, the Great Depression and the Second World War, the 60-40 portfolio generated an annual return of 5.8% from 1930 to 1945. The key, of course, is to keep a cool head and stay invested through the turbulence. And that's exactly what we do!

Market review

Canadian Equities: a Positive Quarter Despite Trump

The Canadian stock market returned 1.5% in the first quarter of 2025, despite signs of slowing economic growth. As U.S. tariffs created economic uncertainty, consumer confidence plummeted and businesses reduced or postponed investment.

The best-performing sectors were materials (+19.9%) and utilities (3.7%). The hardest-hit sectors this quarter were healthcare (-9.5%), information technology (-7.5%), real estate (-2.6%) and industry (-2.3%).

The materials sector benefited from rising gold prices and global demand for energy transition metals such as copper. The utilities sector performed well, thanks to the essential nature of its services and its regulated revenue models...

U.S. Equities: Struggling Amidst Fears of a Recession!

U.S. equities fell, losing 4.4%, fuelled by fears that the U.S.-led tariff war against its trading partners could rekindle inflation and tip the economy back into recession. Investors retreated from US equity markets due to heightened uncertainty, escalating tariff risks and renewed skepticism about the dominance of the US technology sector.

The hardest-hit sectors during the rocky quarter were consumer discretionary (-14.0%), information technology (-12.8%), communication services (-6.4%) and industrials (-0.5%).

The magnificent 7s, which had clearly benefited from Donald Trump's election, have suffered a reversal of fortune and are among the worst performers in the S&P500 since Inauguration Day on January 20, with Tesla leading the decline.

Macroeconomic pressures, such as the threat of tariffs affecting world trade, high valuations and uncertainty about earnings sustainability, have triggered a wave of mass selling.

Investor sentiment collapsed and the consumer confidence index fell to 57.0 in March 2025, its lowest level in almost two and a half years...

The Economic Policy Uncertainty Index, reacting to Trump's economic policies and negative media sentiment, has risen 104% by March 2025.

International Equities: Rally as Capital Flows Shift to Europe

International equities generated a return of 6.3% (in Canadian dollars) in the first quarter of 2025.

The MSCI Europe index gained 10.1% over the quarter, with the UK, France, Switzerland, Germany, Sweden, Italy and Spain posting returns ranging from 8.4% (France) to 21.8% (Spain). Trump's erratic economic and trade policies have benefited Europe, with many investors turning away from US equities in favor of European equities. The prospect of massive investment to rearm European countries also supported defense stocks...

Emerging Markets: a Mixed Start to 2025

The MSCI Emerging Markets Index returned 1.8% (in Canadian dollars) in the first quarter of 2025.

Unlike Wall Street, the Chinese stock market started 2025 on a positive note, with a 14.7% return in the first quarter. Factors in the Chinese stock market's favor included US tariffs, which were tough but less aggressive than expected; renewed optimism about the Chinese economy; the upturn in domestic demand; and the emergence of DeepSeek (a new model of open-source artificial intelligence, cheaper and more powerful than those hitherto known). DeepSeek challenged American dominance in artificial intelligence and marked a turning point in the technology sector.

South Korea gained 4.7%, with shares in Korean pop music companies (K-pop) posting double-digit gains. K-pop stocks attracted investor interest, as the media and entertainment sector is not exposed to the risk of US tariffs.

The Indian market declined by -5.1% in Q1 2025 due to domestic economic difficulties, including poor corporate performance, high valuation levels and continued withdrawals by foreign institutional investors.

Taiwan's stock market declined in the first quarter of 2025, posting a return of -12.2%, mirroring the decline seen in the US, with semiconductor and AI stocks performing poorly.

Bond: Stability in Turbulent Times

The economic context was favorable for bonds, as growth weakened due to US tariffs.

In the first quarter of 2025, the yield on 10-year Government of Canada bonds fell from 3.23% to 2.97%, driving prices higher. This decline occurred against a backdrop of a 50 bp reduction in the key overnight rate by the Bank of Canada (the key overnight rate was cut to 2.75% in March).

In the first quarter of 2025, Canadian bonds generated a total return of 2.0%. With a yield to maturity of 2.97%, 10-year Government of Canada bonds are a stable source of income while helping to protect portfolios in the context of recent trade tensions related to tariffs imposed by the United States...

Note

[1] The Dumbest Trade War in History, Wall Street Journal, January 25, 2025.

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