The first 100 days of the new U.S. administration have been marked by uncertainty, especially from the global perspective and certainly from the U.S. market’s view. The stock market has largely retraced the gains it made following the election, a clear indication of investor concern. So, what have we seen so far?

• Erratic and frequent pronouncements, often followed by delays and reversals.
• A shift towards aggressive "kiss the ring" diplomacy and negotiation tactics.
• An apparent disregard for decades of carefully built international relationships and diplomatic channels.
• Perhaps most shockingly for Canadians, there has been an apparent indifference toward our long-standing relationship, our borders, and our shared economic interests.

In short, the past few months have been unsettling, and many of us are already feeling the fatigue of these constant shifts. How is the market reacting and what can we expect moving forward?

 

Market Uncertainty and Its Effects

There’s an old adage: markets don’t like uncertainty. And for good reason. Financial markets are designed to efficiently allocate capital, help set prices for assets, offer liquidity, and allow for diversification of risk. However, uncertainty disrupts all of these functions. It pushes capital into "safe havens" like government bonds or blue-chip stocks, distorts price discovery as increased volatility makes it difficult to predict future returns, pauses decision-making as companies hesitate to invest, and raises borrowing costs as investors demand higher returns for taking on more risk. Yet, despite these concerns, the current stock market correction has been orderly. For example, while the VIX—a gauge of expected market volatility—has risen from a low of 14 to 25, this is still far below last summer’s spike when it nearly hit 50. Additionally, bond spreads, which measure the risk premium of corporate bonds over risk-free treasuries, have barely budged, remaining stable even as uncertainty rises.

 

A Rational Market Response

This calmness in the bond market is a positive sign. Bond investors are paid to manage risk, not ignore it. While the market has shown some signs of stress, it is responding rationally to a rapidly evolving situation. Currently, High yield and investment grade bond spreads, which measure the additional compensation requested by investors in these bonds over risk-free bonds like treasuries, have barely budged in recent weeks and stand well below long-term averages.  For example, investment grade bond spreads stand at 1.14% over treasuries, well below the 1.82% average spread since 2002, and high yield bond spreads stand at 3.00%, again well below the 4.99% average spread since 1987.  It’s important to maintain a calm and methodical approach as we navigate this uncertain period. The bond market is acting very calmly and rationally to a quickly evolving situation.  We should endeavor to do the same. 

The U.S. Administration's Goals and Actions

The current U.S. administration has inherited a strong economic foundation, giving it the leverage to pursue an agenda that disrupts the current global order.  They believe the U.S. has been a net loser under existing trade deals and defense commitments, particularly with respect to trade deficits and shared costs.

They are wielding the tools at their disposal—primarily tariffs and aggressive rhetoric—to assert their dominance and push their agenda. These tools have been effective on countries where they can have an immediate impact, such as Canada and Mexico, but less so on nations like Russia, with whom the U.S. has minimal trade.

 

Corporate and Global Responses

In response, corporate America has been quick to demonstrate loyalty to the administration, understanding the risks of not doing so. For example, BlackRock has led a group to buy back Panama’s ports from Hong Kong-based CK Hutchison, and Taiwan Semiconductor has committed to investing $100 billion in U.S. chip manufacturing. While it remains to be seen whether these investments are genuine or merely attempts to garner favor with the administration, the scale of these moves highlights the pressure companies are under.

 

Internationally, countries like Canada, China, and India have begun to implement their own tariff strategies and trade adjustments in an effort to mitigate the damage caused by U.S. policies. China, for example, imposed 15% tariffs on U.S. cotton, chicken, and soybeans, potentially targeting U.S. farmers who benefit from government subsidies. Similarly, Canada and European nations have been reevaluating their economic and foreign policies to diversify away from dependence on the U.S.

 

Economic Data and Market Adjustments

While economic indicators have softened in recent months, they have not collapsed. For instance, the U.S. Purchasing Managers’ Index (PMI) for February showed drops in new orders, an increase in inflation expectations, and a decrease in hiring plans. However, the overall economic outlook is still relatively stable.Diversification, as always, has proven beneficial. International markets, such as MSCI EAFE and Emerging Markets, have outperformed U.S. stocks year-to-date, demonstrating the value of spreading investments across regions and sectors. Despite concerns about rising inflation from the tariffs, bonds have posted positive returns. This highlights the shifting dynamics in global markets, and the need for a diversified approach to manage risks.

 

The Broader Shift in Global Dynamics

The key takeaway here is that markets and investors are adjusting to a new global reality. The U.S. administration’s focus on short-term wins is eroding its long-term position as a global leader, forcing allies like Canada and Europe to reevaluate their economic strategies during the course of this administration. This shift presents both risks and opportunities, but we remain optimistic that the results will lead to better outcomes for the world in the long term. For now, we remain focused on managing your wealth with a calm and steady hand. As emphasized by our previous blog post, active portfolio management and goal-oriented planning are crucial during times of uncertainty. While we cannot ignore the short-term impacts of trade policies, we believe in the ability of the companies we invest in to navigate these changes and continue to grow.