Looking Back and Looking Forward
We thought it best to delay our quarterly newsletter by a couple weeks to see how events might unfold post the April 2 U.S. tariff announcement. We’re glad we did. It’s been a bit of a rollercoaster since, but things have become slightly more clear in recent days (slightly being the operative word).
Let’s first briefly recap what happened in Q1, which already seems like ages ago. You’ll recall that going into 2025, the popular narrative was that a Republican-controlled Congress, led by Trump, would pursue an agenda of lower taxes, deregulation, and other business- friendly action that would be positive for U.S. equity markets. Going into 2025, positioning and sentiment indicators were extremely bullish for the U.S., and U.S. equity market valuation was very high relative to historical norms. As famed Merrill Lynch economist Bob Farrell has always said, “When all the experts and forecasts agree – something else is going to happen.” And it did. In short, U.S. equity markets materially underperformed European, Asian, and even Canadian equity markets in Q1, as it became increasingly clear that Trump’s first major order of business was to begin an all-front tariff war that could plausibly lead to a period of stagflation – slow economic growth and rising prices.
Then came April 2, when the U.S. presented reciprocal tariffs on its trading partners, igniting a couple action-packed weeks in the global economy and markets. The reciprocal tariffs were a big negative surprise to markets – not only in their magnitude, but in the lack of demonstrated rigour in arriving at each country’s tariff levels. Several turbulent days followed the announcement, not only in equity markets but notably in credit markets. Specifically, the U.S. 10-year Treasury bond did not behave like a safe-haven asset, as it has for decades during other periods of market upset; rather, Treasury yields rose very quickly in a short period of time. Several possible reasons are being cited for this move, including markets pricing in tariff inflation, markets losing confidence in the U.S. broadly and selling “everything U.S.”, Chinese dumping of U.S. Treasuries, etc. Regardless of cause, the rapid backup in Treasury yields got the attention of the White House, moving Trump to announce a 90-day pause on the reciprocal tariffs he’d announced just one week prior – with one important exception. Trump raised tariffs on China to a level that effectively creates a trade embargo on the country. China, not surprisingly, reciprocated with a similarly egregious tariff rate on the U.S, along with other countermeasures.
Where does this leave us? China and the U.S. are in the midst of an all-out trade war. Neither side wants to show weakness, hence it’s difficult to gauge how long this stalemate might last. At the same time, the U.S. is supposedly negotiating trade terms with the 75+ countries that we’re told have come to the table. While these negotiations take place during the 90-day pause, 10% tariffs remain in place on products coming into the U.S. There are also higher sector-specific tariffs on products like steel and aluminum, and further sectoral tariffs are being considered on semiconductors, pharmaceuticals, and other items deemed critical to U.S. national security. Not surprisingly, U.S. allies are re-evaluating their relationship with and dependence on the U.S., both economically and militarily, given the approach of the new Administration.
With all the moving parts, an economic slowdown appears to be taking hold. At time of writing, the Atlanta Fed GDPNow tracker is showing U.S. Q1 real GDP contraction of 2.2%. This shouldn’t surprise anyone, as business and consumer decisions are being paralyzed by the shroud of uncertainty. A recession might already be here, and if so, many would argue markets haven’t fully priced in that downside. While the U.S. Federal Reserve might typically be relied upon to provide support to a flagging economy, we note that the inflation side of their dual mandate may constrain them, as tariffs represent an inflationary risk which the Fed must respect.
In the near-term, the economy and markets will be sensitive to where trade policy ultimately settles. We’re hopeful things get resolved as quickly as possible, such that consumers, businesses, and capital markets participants can understand the new rules of the road and move forward with greater confidence.
Our Core Model Portfolios
As mentioned, Q1 was a tough one for U.S. equities. While the U.S. equity market has long been at the core of the ATH’s capital growth model portfolios, we entered 2025 more defensively positioned, which produced solid relative performance for our clients. Specifically, we came into 2025 holding significant allocations of Canadian short-duration investment-grade bonds, as well as precious metals streaming and royalty assets. In Q1, these allocations provided both stability and positive return in our core capital growth models. We had also entered 2025 with a material overweight in Canadian equites vs. global benchmarks, as well as substantial holdings of European and Asian equities. As mentioned, these geographies materially outperformed the U.S. in Q1, mitigating the poor performance of U.S. equities. In the ATH Income portfolio, our allocations to Canadian short-duration fixed income as well dividend-growth equities served as an effective ballast in the choppy waters of Q1. We believe our core models continue to be well-positioned, and we’ll remain vigilant as we navigate this uncertain environment on behalf of our clients.