5 • 4 • 3 | More fear than harm (so far)

Hello everyone. Today, June 5, we're going to take as usual just a few minutes to look back on what turned out to be quite a spectacular quarter and then look ahead and try to shed some light on what may lie ahead, always with a good dose of humility given prevailing uncertainties. 

What made last quarter so spectacular was obviously the bombshell tariff announcement of April 2, which sent U.S. equity markets falling by about just 10% in just two days as recession risks were actually doubling, which was definitely a non-sustainable situation, which effectively lead, just a week later, to a 90-day pause and a substantial rebound. This was actually the third best day for U.S. equity markets in the last 6 decades. But behind that there was an escalation in tariffs with China, which was equally unsustainable and also lead ultimately to a 90-day pause this time in May, which brings us to today with recession risks still higher than usual but somewhat stabilizing as equity markets have recouped most of their losses.

When we look at what this all means for a globally diversified portfolio in Canadian dollars, this all means that we are essentially back to where we were last February. That is marginally positive, somewhere between 0% and 5% depending on your risk profiles, thanks to equity markets outside of the U.S. which continue to do better this the last few months, notably in Canada, but also elsewhere overseas. So, a lot of volatility, but ultimately not too much damage down the road. This was largely the expectations as we entered the year and that remains our expectations as we look forward, although there is obviously still potential for surprises. Specifically, what we'll be looking at is the actual impact on the economy of all that has happened since the start of the year, because for now, the impact is mostly being felt in sentiment surveys, for instance, consumer sentiment, which is according to some surveys, near its weakest in the last 35 years, which is quite a contrast with the actual state, the concrete data of where the economy is with things like inflation or the unemployment rate, which if you look at the most recent data was anything but dramatic. Now, there are some pockets of weaknesses here and there. We've got to be careful, but overall, nothing overly dramatic. 

For as long as fluctuations in tariffs remain limited going forward and the U.S. administration remains focused on reaching so-called trade deals – and that is in their interest –, odds are that the reconnection between sentiment and reality will happen at a level not overly problematic for the economy and not overly problematic for equity markets accordingly, where we have seen some sort of the same trend with sentiment surveys from investors actually showing the most pessimism in the last 35 years. Ironically, this is typically a sign that the worst is actually already behind us. Now as in any rule, there's always exceptions. So, we've got to be careful here. Equities have rebounded already quite a bit as we've talked about just a few minutes ago. But again, it does suggest that bearing a global recession – and we don't foresee one for now –, odds are that the path of least resistance for equities will actually remain upward for the remainder of the year.

Three takeaways for now. Again, more fear than harm, so far. We've seen markets react sharply to these tariff announcements, with initially consumers, businesses, investors, sentiment surveys plunging. That sent a strong signal to Washington, which effectively changed its tone, a change in tone that remains fragile, much like the economy and it also remains fragile. The coming months will be very revealing on both fronts. We should get more precision as to all the parameters of their economic agenda and the scale, the amplitude of the economic slowdown that will result from these policy changes. Stay tuned, but this promises to be a volatile summer period. But again, bearing a global recession, which we don't foresee, odds are that equities will remain well footed, especially outside of the U.S., which is a trend that we see ongoing for the remainder of the year.

Thank you for listening. Have a great summer everyone, and we will talk again in September.