In our recent post Trump-certainty, it’s like uncertainty but less certain, we tried to put the market in context, and we highlighted that we expected volatility to increase after being relatively muted for the last two years.

 

Volatility is the price that markets make us pay in the short term to capture compounded returns over the long term. Markets hate both uncertainty and surprises, they are the ingredients for volatility, and we got both last week:

• The tariffs announced by the US administration on Wednesday were larger and broader than expected.
• The formula used to calculate tariffs was unsophisticated and did not appear thoughtful.
• Some countries, like Canada and China, immediately responded by escalating their tariffs.

Markets are forward-looking, and they are currently pricing in a vicious cycle of increasing tariffs, unthoughtful government responses, a higher probability of recession, a weakening of the USD’s reserve currency status, and a pause in consumer and capital spending as we try to understand our ‘new’ world. 

 

The situation is uncomfortable, especially because the damage is unnecessary and self-inflicted, but markets are forward-looking, and sentiment could improve quite quickly if:

• Countries reduce their tariffs and measures to protect domestic industries, and the US Administration reciprocates in kind (by lowering or removing tariffs). This could provide a path for de-escalation or an ‘off ramp’.
• Countries focus on incentivizing and supporting domestic production rather than trying to punish the importation of foreign goods.
• Responses begin to appear more thoughtful and confidence inspiring. It feels like this is a time for thinking caps rather than elbows.

The ultimate silver lining may be that:

• Canada is inspired to build productive infrastructure, support our commercial sectors, incent entrepreneurs and innovation, fix interprovincial trade, and diversify our international trading partners.
• Europe finally becomes a union and executes the same playbook we just laid out for Canada. The same could be said for Asia, Africa, and South America.
• Companies continue the journey they started during the pandemic by moving their production factors closer to the customers who buy their products. We may see regional trading blocs emerge (North America, Europe, Asia, …) with companies locating production in each region.

Volatile markets are unsettling, but we’ve prepared for these situations by diversifying across asset classes and geographies. Positively, volatility also creates opportunities.

 

We never pretend to know what will happen to markets in the short term, but I’d encourage you to look through the charts in Trump-certainty, it’s like uncertainty but less certain.

 

You’re always welcome to reach out to us directly.

 

Delli (delli@cibc.com) 

 

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