Trump’s trade war goes global

The market fallout was swift and brutal: sharp drawdowns ensued across global indices that at points rivaled previous historically significant selloffs.

The scenario that unfolded tells an important story. For one, it highlighted that Trump’s tolerance for market pain may be higher than observers had anticipated. Many companies had planned for some kind of tariff, but few were expecting anything this dramatic. As a result, operational models are likely to change dramatically, and we’ve already seen some companies, including automaker Stellantis, begin to slow production or lay off workers.

Consumer confidence levels are also likely to drop significantly—and they weren’t great to begin with. Prior to Trump’s Rose Garden news conference, consumers were already concerned about costs and overall economic uncertainty. Consumers are the engine of the economy, and when they are anxious, they will hoard savings and pull back on spending, as we saw during the COVID-19 pandemic. We may look at the present moment as something akin to a geopolitical pandemic rather than virological, but the contagion risks are comparable. In former’s case, it was the vaccine rollout and re-opening of public spaces that was the light at the end of the tunnel. In this case, there is no such light, as any potential easing rests on the shoulders of the man who introduced the tariffs in the first place: Donald Trump. There are hopes that tax cuts and de-regulation in the second half of the year can reverse the slide. But the focus for the present is solely on trade fallout.

Many companies had planned for some kind of tariff, but few were expecting anything this dramatic.

At present, we have no idea how long this trade war will last. The outlook on jobs looks weaker, and investors have ample reason to be bearish. We continue to have hedges, such as gold, in place, and we will continue to seek out ways to add protection, such as options. Looking ahead, if market nervousness continues, we don’t expect the highest valuation names to be safe—rather, they could be at the forefront of the downturn. If a segment is likely to hold up, we’d expect it to be Value, while low-volatility strategies make sense as a way to ride out the choppiness.

Fortunately, we received a 90-day pause and just a 10% across-the-board tariff (with a few exceptions including China, which increased to 145%) which has calmed markets down. This was much-needed and from the sounds of it, we have the bond market and some influential CEOs to thank. Market reaction the week following the severe tumult was extremely positive, including the >10% S&P 500 and NASDAQ single-day returns.

It is important to remember that it is still a pause and by no means the end of the tariff discussion. China and U.S. are still in the early rounds and these two economies can shake the global landscape if the trade war escalates further. Make no mistake, extreme caution is warranted. That said, any good portfolio manager will also be keeping an eye out for quality assets that are trading at a discount. If you believe tariffs at these levels are not going to last forever, then that could make certain stocks very attractive over the long term. Our stance is that dipping your toes in makes sense, but that people should avoid being too eager to go overboard on the buying. You will never time the bottom perfectly and likely will see markets a bit lower in the short term—but this is not a short-term game. Markets will remain volatile in the days, weeks and perhaps even months ahead. We’d also advise against “panic selling.” That’s not to say that you should not sell if you are uncomfortable—rather, don’t simply sell for panic reasons without properly assessing the current situation first. Ultimately, what we need is stabilization, and that can only come when buyers re-enter the market.

U.S. outlook

The policy environment is changing rapidly—even the so-called “liberation day” tariffs would have needed to be significantly benign to change the headwinds we now foresee, and we doubt we are done with the policy uncertainty (see chart). The rearview data—household and corporate balance sheets, job growth and other fundamentals—were constructive. What’s in front of us is decidedly not; odds of a recession are likely now above 30% and probably rising. What happens to hiring and investment decisions for goods-producing sectors, for example? As much as Trump wants to make U.S. manufacturing great again, global supply chains are a real concern for businesses, and existing manufacturers now face a huge operational struggle alongside macro uncertainty. The paperwork around tariff compliance isn’t trivial, either, adding more friction that is negative for growth.

We are cognizant that Trump could change his policy position quickly. Weakening data could trigger a lessening of tariffs (there is still almost certain to be duties, but ones less damaging to the economy). The U.S. administration may not respond too reactively to Equity weakness, but it might well respond to mounting job losses. Then there's the question around prices—Trump was elected on the back of lowering inflation, yet is now poised to deliver a new round of price shocks. U.S. households have faced cumulative inflation of 25% in the past five years, and they are about to see another leg up in addition to what may be a spiraling negative wealth effect as the stock market falters.

There are few if any positives to point to regarding the present U.S. economic outlook. Tax cuts and deregulation later this year could help reverse the present slide. But after a couple of solid years of consistent surprises to the upside, downside risks now abound.

Spikes in policy uncertainty tend to unwind rapidly

Source: Bloomberg, BMO GAM, as of April 3, 2025.

Canada outlook

Like other countries, Canada perhaps owes a debt of gratitude to the sitting U.S. President for waking the country up. In the run up to the April 28 election, policymakers are at last talking about things we should have prioritized over the past decade, namely safeguarding—and growing—prosperity. There's been almost no job creation in the private sector of the economy in the past two years, with net employment rising only as a result of government, social and healthcare gains. That’s a wake-up call. Another supposed wake up call is the push to remove interprovincial trade barriers as a cure-all against poor economic growth. Though something worth doing, the net impact should be taken with a grain of salt.

Most of all, the economy needs a detox from government expenditure. In our view, the wake-up calls will need to grow louder still—for example while consumers saw carbon taxes fall on April 1, the tax on businesses is still going up. The policy agenda in the U.S. is going the other way, while policy here keeps penalizing Canadian businesses. Regardless of the election outcome, political leaders must find ways to support the private sector, from taxes to regulatory relief; new policies aimed at reshaping economic growth, and attracting foreign capital and promoting investment opportunities.

International outlook

Speaking of wake-up calls, the loudest has been heard in the Eurozone. The existential threat to trade as well as the risk of NATO without U.S. leadership is a doubly significant hit. Policymakers and the private sector are now doing things most never thought possible: the removal of the German debt brake on fiscal policy, multiple European Union (EU) members drastically re-thinking defense plans, and in general, a renewed pursuit of a pro-Europe, pro-growth agendas. It is a great irony of the America First that once-allied countries and regions are drastically rethinking strategic and economic plans that break markedly from what’s been in place since the end of World War 2. Our view is, it's a positive development—the much-needed wake-up call that holds the potential to reverse the EU’s serial growth disappointments to something structurally much stronger.

Prior to April 2, we had grown slightly bearish on Equities (-1) while sticking to neutral (0) on the remaining asset classes. Frankly, markets in general, and stock investors in particular, hadn’t come close to pricing in risk by a significant margin, even before the tariff edict. Yes, stocks had slipped into correction territory but barely, and it was arguably more a function of overvaluation rather than policy or trade uncertainty. As such we had begun reducing positions, while simultaneously increasing and narrowing our downside hedges via options. This has proven timely, and directionally sound, despite the downside exceeding our expectations (which is fair, considering the scope and depth of tariffs caught most offside).

With a trade war entering the equation, the degree of outflows from Equities now reflects the very material rise in global recession risk. Industrial production measures from ISM survey data were already softening before Trump’s trade bazooka went off. Earnings were also showing deterioration; first-quarter downgrades were rising while lower guidance revisions were trending up. Perhaps we see some relief rallies if the tariff risks contain some bluster but one thing we know is, Trump 2.0 is not Trump 1.0— policy that may have been curbed is now pursued aggressively. From an allocation standpoint, it creates the question: If you're going to be wrong, which way do you want to be wrong? Do we miss out on a market rally, or avoid the loss of capital? The math of investing says protection of capital wins every time.

On bonds, as markets have sold off, we've seen 10-year Treasury yields come in, which is a combination of demand for Fixed Income and concerns over economic growth. Our portfolios have benefitted from an overweight to bonds, but now prudence dictates allocating back to cash (neutral, 0). Our cash levels are roughly neutral, while being opportunistic in using it to pay for additional puts on broader equities.

From a macro perspective, the stage has been set: a downgraded U.S. growth forecast amid upgraded inflation expectations. That is the Fed’s base case, and the market consensus. It increases the probability of stagflation taking root. One silver lining investors can look to is, while the focus is rightly fixed on tariffs, that could change quickly. It is quite likely that over time, many if not most duties may be walked back. The focus should also shift in the second half of the year to a fiscal package that includes tax cuts and deregulation. Our expectation is for pro-growth catalysts later in the year to help offset some of the negative growth catalysts happening now.

On the Canadian market,despite the tariffs on certain sectors, it appears that Canada did receive something of a reprieve compared to many other countries. The outcome of the April 28 federal election is a source of uncertainty on top of an already uncertain time. It doesn't put us in the best negotiating position in the short term, which could have some market implications (tariff impacts on on steel, aluminium, and automobiles et al.). An important caveat however is, this election should help reset relations with Trump, regardless of the winner. We view that as a positive. Another positive is, we are likely to see much-needed policy that is pro-growth and pro-private sector.

We’re growing increasingly constructive on Europe and Emerging Markets (EM). A common theme for both is fund flows into those Equity markets, much of which is coming from their own domestic investors drawing down U.S. Equity positions and bringing that capital home. Moreover, we believe there's a lot more that could be repatriated. In Europe's case, fiscal supports are another catalyst, particularly for Germany.

In what’s a pretty consistent theme across the portfolios for the moment, we’ve undertaken a lot of neutralizing our bets on bonds given the extent of the near-term uncertainty—there simply isn’t the conviction to take big swings either way in our Fixed Income allocations or elsewhere. In terms of score changes for the month, we’ve moved our views on Canadian Duration¹ and Investment Grade to neutral (0), while maintaining a neutral view on U.S. Duration and a bearish outlook for High Yield credit. We now see greater scope for the Fed to cut its interest rates more aggressively in 2025. As market volatility² has grown, we’ve seen some spread widening, most notably if not surprisingly in High Yield. But spreads are still too tight, necessitating in our view an underweight or a combination of that alongside adding hedges to those bonds within the portfolios.

Our move back to neutral (0) on longer-dated Canadian government bonds reflects the increasing uncertainty of the domestic outlook, as well as flows back into the short end of the yield curve. Our view is, given the Bank of Canada’s reliance on data-supported policy, they (like most other central banks at the moment) are likely to be slow to respond, maintaining a more restrictive policy rate.

Lastly, given the broad market flux, it's important to have global diversification. It is why we hold U.S., Canadian and Emerging Market bonds. This environment makes being globally diversified on the Fixed Income side very important, given our expectation of policy divergences among central bank this year.

Broadly speaking, if we're neutral to nervous on the markets (we are), we're neutral to nervous on Growth (downgraded to -1, or slightly bearish), including names within the closely watched Mag 7 stocks. Talking about the Mag 7 as a single entity no longer makes sense in the current environment. Leaving aside the politically related impacts to Tesla, the nature of these businesses are so fundamentally different—and consequently, impacted differently by global tariffs—that talking about them as a group no longer makes sense. They are merely an indication or proxy of the broader market by virtue of their immense market caps. Some—Meta, Nvidia, Alphabet—are falling on the broader AI sell-off that DeepSeek has triggered, with the market now asking if these companies are in fact bulletproof when it comes to future earnings. But mega-cap valuations were cracking even before the broader market started its descent, and there isn't a compelling reason we can see to believe they would lead on the way back up.

Our downgrade on Growth reflects our view that we’re in a market rotation toward Value, and into broader equal-weight exposures versus cap-weighted allocations, as well as diversification into other sectors. We remain slightly bullish (+1) on Quality as well as Yield (+1) for much of the same fundamental reasons why Value makes sense (earnings yields vs. U.S. 10-year bonds tell us valuations are getting cheap, though perhaps they will grow cheaper still). We have moved back to neutral (0) on Size, curbing our Small Caps positions. Why haven't we blown out Small Caps entirely? They are still primary beneficiaries of tax cuts and tend to be more domestically focused, i.e., offering a small a hedge against a global trade war, although certainly not immune to a broader U.S. recession, should one materialize.

Another notable feature has of course been the spike in volatility, not only in Equities, but Fixed Income as well. Low vol strategies in general offer a certain degree of shelter from the storm, but also the ability to capitalize through the sale of options that now command higher premiums as a result. Both are strategies that have been deployed across our portfolios.

We have moved to slightly bullish (+1) on the Canadian dollar (CAD). Part of our rationale for a prior hedge of U.S. dollars (USD) back to CAD, was because we were overweight U.S. Equities. As we have closed out our U.S. Equity overweight, so too are we neutralizing our view on hedging USD.

On Gold, once it cleared US$3,100 an ounce, it basically surpassed the majority of analysts’ high-end expectations for 2025—here we are in April and we've blown through it. The next line in the sand is US$3,500/oz. It continues to be the thing that works when nothing else does; it is a U.S. dollar hedge, an economic and volatility hedge and overall risk asset hedge. Technically speaking, it's about as overbought as it can be, which makes us sensitive to adding at this point—but we are buyers on pullbacks.

With respect to portfolio protection, we're technically underweight on Equites on a delta-adjusted³ options basis. We've materially tightened up some overlay positions in terms of buying additional downside insurance—bringing the safety net higher up so to speak. Upping protection levels is likely sound strategy ahead what could be a pretty disruptive period for the market.