Global Index Performance
Fixed Income*
In February, the Canadian bond market showed resilience, driven by stable interest rates and a flight to safety amid global economic uncertainties. The Bank of Canada (BoC) made the decision to cut its key interest rate by 25 basis points to 2.75% on March 12, 2025, due to heightened trade tensions and tariffs with the U.S. If these tariffs materialize further, they could drive inflation higher while dampening economic growth, creating challenges for policymakers. In the U.S., inflation ticked down slightly to 2.8% in February, while the unemployment rate experienced a marginal increase.
Equities
Canadian equities experienced a slight decline, reflecting the broader market’s cautious sentiment amid increased uncertainty. The implementation, suspension, and subsequent reinstatement of tariffs on $30 billion worth of U.S. goods in February contributed to equity market volatility. The technology sector experienced the largest decline, while gains in materials, consumer discretionary, and utilities helped mitigate declines.
U.S. equities saw a more significant decline for the month, as investor sentiment was dampened by the ongoing trade tensions and concerns over the U.S. administration's policy agenda. The reinstatement of tariffs at the end of February further spurred volatility, contributing to cautious investment behavior. Heightened fear and uncertainty among investors, driven by the fluctuating U.S. dollar and tariff fears, also contributed to risk aversion, amplifying downward pressure.
International equities outperformed North American stocks in February, driven by optimism about potential ceasefire talks between Ukraine and Russia. Emerging market equities remained relatively flat for the month. Gains in Chinese technology stocks also helped offset some of the negative impacts from global trade tensions.
Tariffs and a Path Forward*
The recent imposition of tariffs between Canada and the U.S. has significant implications for both economies. Historically, trade restrictions like tariffs have often led to higher prices for consumers and businesses, contributing to inflation and economic instability.
As of mid-March 2025, the U.S. has escalated trade tensions with Canada by imposing a 25% tariff on Canadian imports, citing concerns over illegal migration and drug flows. In response, Canada announced a 25% tariff on $30 billion in U.S. goods, later expanding it to $50 billion. While most additional tariffs are delayed until April 2, both countries have already imposed 25% tariffs on each other’s steel and aluminum as of March 12. The fallout has been swift—both U.S. and Canadian stock markets have seen sharp declines. With the next round of tariffs looming, volatility may persist as businesses and policymakers grapple with the potential for further economic disruption.
To understand the potential implications for Canadian investors, it’s helpful to look at historical examples of trade conflicts and their economic impacts. While each situation is unique, past trade disputes offer valuable lessons about market volatility, business uncertainty, and long-term economic consequences6:
- Smoot-Hawley Tariff Act (1930): Enacted during the Great Depression, this U.S. law imposed high tariffs on nearly 2,000 categories of imports. In response, Canada and other countries implemented retaliatory tariffs, leading to a significant decline in global trade and exacerbating the economic downturn.
- U.S.-Japan Trade Conflict (1980s): In response to a growing trade deficit, the U.S. imposed tariffs and trade barriers on Japanese goods, particularly in high-end manufacturing sectors like automobiles and electronics. The conflict disrupted supply chains, strained diplomatic relations, and highlighted the risks of escalating protectionist policies.
- U.S.-China Trade War (2018-2020): The U.S. imposed tariffs on Chinese goods to address trade imbalances and intellectual property concerns. China retaliated, leading to increased costs for businesses and consumers, significant market volatility, and global supply chain disruptions.
A recurring theme across these conflicts is the amplification of economic uncertainty. This heightened uncertainty often results in cautious corporate behavior, delayed expansion plans, and increased market volatility.
In both historical and current contexts, tariffs disrupt economic stability. Businesses face higher costs, consumers experience price increases, and overall economic growth is stifled. The goal of policymakers is to balance protective measures with broader economic stability, while investors must be prepared for all potential outcomes as the situation continues to evolve.
Given the current uncertainties and market volatility, we have decided to trim both Canadian and U.S. equities exposures in favor of cash and fixed-income investments. This strategic move allows us to manage risk more effectively and position ourselves to take advantage of potential opportunities as the situation develops. However, we continue to monitor key trade developments closely. Signals such as progress in trade negotiations, de-escalation of tariffs, or economic stabilization could prompt a reassessment of our equity exposure. By maintaining a diversified portfolio across geographies and asset classes, Fiduciary Trust Canada aims to mitigate volatility while capturing growth opportunities when market conditions improve.
*Data sourced from FactSet as of March 11, 2025.
1. As measured by the FTSE Canada Bond Universe Index
2. As measured by the S&P/TSX Composite Total Return Index
3. As measured by the S&P 500 Total Return Index in CAD
4. As measured by the MSCI EAFE Total Return Index in CAD
5. As measured by the MSCI EM Total Return Index in CAD