THIS WEEK WITH SADIQ
2025 is off to a bumpy start. A sign of things to come?
January 13 to 17, 2025
Market Update
- Equity markets slumped this week and have faced some tough sledding to start 2025 amid tariff concerns and rising bond yields.
- The S&P 500 fell 1.9% on the week, with technology, financials and consumer discretionary underperforming.
- The TSX gave back 1.2%, as gains in materials and energy weren’t enough to offset declines across all other sectors.
Monthly perspectives
Equities
Fixed Income
Cash
Asset Mix
- We are maintaining a sizeable overweight to equities to start 2025 as we expect investor sentiment to continue improving following Trump’s victory.
- Additionally, the U.S. economy continues to positively surprise while other major economies remain challenged.
- The better-than-expected U.S. economy also means the U.S. Federal Reserve may slow its interest rate cuts in 2025.
- We remain neutral on fixed income and continue to prefer to fund our equity overweight with cash.
Canada
U.S.A.
EAFE
EM
Equity
- Our regional equity mix remains unchanged this month.
- We continue to prefer U.S. equities given our bullish view on the U.S. economy and outlook for corporate earnings.
- We remain underweight to international and EM equities as we expect these markets to face increasing headwinds from Trump’s America First policy agenda while we suspect their economic outlook might continue to disappoint.
- We remain neutral on Canadian equities, but we prefer them to international and EM equities as we think Canada is better positioned to handle Trump’s America First policy agenda while the more aggressive Bank of Canada rate cuts will help the Canadian economy in 2025.
IG Credit
High Yield
Duration (U.S.)
Duration (Canada)
Fixed Income
- We remain slightly overweight to Canadian bond duration as the sluggish pace of Canadian economic activity and ongoing Bank of Canada rate cuts should continue to weigh on long-term interest rates.
- We downgraded investment grade fixed income to neutral as we prefer to take equity risk given the tight credit spreads.
- We remain slightly overweight to gold as we expect fiscal deficits and inflation fear to persist while we believe investors’ appetite for gold remains in a secular bull market.
Value
Size
Quality
Momentum
Style/Factor
- We downgraded value stocks to neutral to start the year.
- We continue to expect some factor rotation after Trump’s election and expect small cap stocks to benefit from the stronger U.S. outlook and Trump policies.
- We continue to expect quality companies to do well and offer a better cushion in case the U.S./global economy was to cool unexpectedly.
Canadian Dollar
Gold
Implementation
- The long-term bull case for gold remains largely intact as a portfolio diversifier while the EM central-bank appetite for gold continues and inflation fear is sticky.
- We remain neutral on the loonie this month, acknowledging that while Trump tariffs could hurt the loonie, we think a lot of bad news is reflected in the value of the Canadian Dollar.
- Once the dynamics of tariffs peaks and diminishes, it could be a good window to start hedging U.S. Dollar exposures, something to watch for during the first half of 2025.
Disclosures
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Weekly Commentary
Equities
Stock markets have been choppy to start the year, with both the S&P 500 and Nasdaq falling on Friday on news of a hotter-than-expected U.S. jobs report. In our view, this volatility is a prelude to what we could see throughout 2025. Markets are trying to figure out what’s important and whether the economy’s trajectory is changing; it’s that uncertainty that is causing these gyrations. There will be both positive and negative data points along the way. But one data point doesn’t make a trend—it’s better to have multiple data points before taking action. That’s why we believe the best way to play this market environment is to stay the course and remain invested. If you try to take the bad days off, you’ll also miss some of the good days. Down days like Friday may be good opportunities to dip back into the market. Looking ahead, it’s likely that both the inflation story and the U.S. Federal Reserve’s (Fed) interest rate decisions will play a big role in the market’s ups and downs. We’ll be closely monitoring labour market news and statements by members of the Fed board—if the numbers are soft, the Fed is likely to be more active in cutting, while if the data is strong, the Fed will have the option of being patient.
Bottom Line: A volatile first two weeks of the year have given us an early glimpse at what 2025 could look like, but we think investors would be wise to stay the course and potentially buy on dips.
Bonds
Over the past several months, the yield on the U.S. 10-year Treasury has steadily risen from a low of around 3.6% in September to 4.7% as of Friday—its highest level since late 2023.1 In our view, this continuing upward movement is a slight surprise. Last year, the expectation was that yields would come down as interest rates fell, and though the Fed did cut rates, the number of cuts didn’t live up to markets’ hopes. Now, it seems as if investors are being a bit more cautious since expectations are that the Fed will only cut rates once or twice this year—in other words, more conservative expectations about the interest rate outlook have become embedded in yields. That, along with the risk of sticky or rebounding inflation, is what is pushing yields higher than anticipated. While we still expect yields to come down eventually, they’re not likely to drop overnight—it will be a slower ride down than many investors are expecting. Occasionally, there will be a sizable step down, like the one we saw in November and early December. But in general, we expect 10-year yields in the 4.5%-plus range to persist for the immediate future.
Bottom Line: We continue to expect yields to come down, but it may not happen until the second half of the year.
Tariffs
We are less than a week away from Donald Trump’s inauguration, and markets are still weighing how seriously to take his threats of significant tariffs on certain trade partners, including close allies like Canada. There’s no question that Trump has been talking more aggressively about tariffs lately, and investors should take note. We think there’s a real chance there could be more tariffs than many people are expecting. They may not reach the extreme levels that Trump has proposed—a 60% tariff on Chinese goods, for instance. But they’re not likely to be zero, either. Those headline-grabbing numbers are the starting point for negotiations. Even if the numbers come down, we believe Trump is likely to implement some tariffs in order to follow through on his election promise and ensure his credibility in later negotiations—because if he doesn’t start off strong, other world leaders may not take him seriously. I’ll be diving deeper into the tariff question in my 2025 market outlook call on Wednesday, January 15. See below for details on how you can join.
Bottom Line: Trump’s tariffs represent a downside risk to other geographies—one which may not be fully priced in—while the U.S. still stands to be a relative beneficiary.
Positioning
For more insights on market risks and opportunities, explore our 2025 Investment Outlook Centre.
Join me this Wednesday, January 15, 2025, for a special edition of the 4:10 PM Pulse, where I’ll be sharing insights on where markets are headed and how to position your portfolios in 2025.
Add to Calendar
Submit your questions in advance here.
Here’s a sneak peek at the top five themes:
1 Sawdah Bhaimiya, “10-year Treasury yield spikes to highest level since late 2023 after hotter-than-expected jobs report,” CNBC, January 10, 2025.