Return of Volatility

Market Recap & Recent Volatility

February saw a return of volatility to the stock market, with the S&P 500 declining significantly late in the month which has carried into early March. After a strong start to the year, some market consolidation was anticipated. March began turbulently, pushing the S&P 500 into negative territory for the year and below its 200-day moving average. The uncertainty surrounding recently announced tariffs has significantly contributed to market anxiety, reversing some of the market gains seen over the past two years and unwinding of the Trump trade since this past U.S. election.

Trade Tensions: Canada & Global Impact

In Canada, a 25% tariff on all imported goods took effect on March 4, while a reduced 10% tariff was applied to Canadian energy, critical minerals, and potash. Days later, a month-long reprieve was granted for imports to the U.S that are compliant with the United States-Mexico-Canada Agreement (USMCA).?The threat of further "reciprocal" tariffs from President Trump looms, creating ongoing uncertainty. These actions are part of a broader strategy to renegotiate trade agreements. The silver lining resulting from the risk to Canada’s economic prospects are pushing our Governments and businesses to pursue substitutions to U.S supply chains, such as with Asia Pacific and European regions, along with boosting domestic trade and infrastructure investment among the provinces and territories.?

Potential Peak in Trade Headwinds?

While trade tensions remain elevated, we believe the current dynamic may represent the peak in tariff-related headwinds, Recently, it does seem the White House is responding to a certain extent to pressure from the economy and financial markets with Treasury Secretary Scott Bessent signaling the potential for relief in the near-term.?There’s also reports that lawsuits may be filed against Trump’s tariff actions, some of which could be in violation of the law.?This gives us encouragement that the trade plan could be curbed further over the coming weeks. In addition to push back from the economy and markets, Republicans in Congress are being more vocal in expressing their displeasure with tariffs.?Nonetheless, a prolonged trade war could erode consumer sentiment and present a political challenge for Trump’s pro-growth agenda.?

The Federal Reserve's Dilemma

The current tariff situation presents a challenge for the Federal Reserve. Tariffs could simultaneously increase inflation (suggesting a need for higher interest rates) and hurt employment (suggesting a need for lower rates). The Fed will need to prioritize which risk to address. Market expectations have shifted significantly, with futures markets now pricing in three interest rate cuts in 2025, a stark contrast to expectations in January. The possibility of the Fed taking action to support the market ("Fed Put") is becoming a more prominent theme.

Market Sentiment & Outlook

Despite ongoing macroeconomic uncertainties, extremely negative investor sentiment may indicate a potential near-term market rebound. Investor emotion has reached deeply pessimistic levels and short-term momentum oscillators are signaling extremely oversold conditions. The AAII U.S. Investor Sentiment Index measures the direction that investors think the stock market is heading over the next 6 months and is a historically reliable contrarian signal. In late February, it registered its highest bearish reading since October 2022, coinciding with the S&P 500’s last major bottom, which was followed by a 70% rally. Overly negative positioning has preceded strong equity performance in the past and should lead to more buying in the weeks ahead.?

Investment Strategy

Volatility is expected to continue as the current administration's policies unfold. While we anticipate slower economic growth, a recession is not our base case for this year. Our investment strategy remains focused on identifying high-quality companies with solid financials, consistent cash flow, and strong competitive advantages. Maintaining a long-term investment perspective is crucial in this environment of headline-driven market swings.

We will continue to prudently manage portfolio, rebalance, and keep you apprised on new developments.

Best Regards,

Trevor

Trevor Hodgins, CPA, CFP?, CIM?

Portfolio Manager, Investment & Wealth Advisor | RBC Dominion Securities Inc.

P: 604-257-2558 | E: [email protected]

Website: https://ca.rbcwealthmanagement.com/ansari.hodgins.group/home

Ansari & Hodgins Group – Private Wealth Management of RBC Dominion Securities

1055 West Georgia Street, 32nd Floor, Vancouver, BC, V6E 3P3