Everything up to that point had been left unresolved
Try imagining a place where it’s always safe and warm
“Come in,” she said, “I’ll give you shelter from the storm”
– Bob Dylan, Shelter from the Storm, 1975
April brought extreme swings in world equity markets. U.S. markets continue to experience the brunt of the volatility. After tumbling in the 10% range in the opening days of April, global equity markets rebounded smartly. By month’s end, most markets had recovered the lion’s share of their early April swoon, positioned roughly where they were at the end of Q1. On a year-to-date basis to April 30, the S&P/TSX is up 0.4%, S&P 500 down 5.3%, international developed markets (MSCI EAFE Index) up a commanding 10.6%, and emerging markets (MSCI Emerging Markets Index) up a modest 3.6%. While bond markets also swung wildly, they are delivering safety to portfolios from a year-to-date perspective. Even U.S. Treasuries made gains on the month despite headlines that investors might be questioning their safety. All told, the return for a typical, balanced, well-diversified Canadian investor saw a 1% to 2% decline in April but sits near flat on the year.
April’s markets had many moving parts. The quick take is that the pillars of the global economy are in good shape heading into the tariff debacle. Consumers are employed and spending; businesses have solid balance sheets and are reporting double-digit earnings growth for Q1 2025. Market observers fear this could change quickly, although they are basing their anxiety not on hard evidence but on deteriorating confidence readings in consumer and business surveys.
It appears that peak tariff shock is behind us as trade rhetoric on all sides is calming down. Inflation continues to cool, but again surveys measuring expectations for future inflation have shot up on tariff fears. U.S. and Canadian GDP reports for Q1 were weak. We should note that the numbers are backward looking. In addition, the trade and spending numbers that feature prominently in the calculations were heavily skewed by businesses and consumers scrambling to stock up and front-run tariffs, which makes it difficult to rely on this data.
Markets spoke; politicians listened
Throughout the last three months, it has been our belief that the most aggressive policies of the new U.S. administration are not aligned with accomplishing their goals. We also feel that what is achievable, sustainable and congruent with the laws of supply and demand in a modern capitalist system will eventually weigh in and exert their influence. April brought evidence that this is playing out – important feedback loops are providing input that is helping policymakers fine-tune the policies they wish to implement. Among these feedback loops are the checks and balances of Congress (the constitutional owners of revenue tools) and the judiciary. Congress has been relatively silent. The judiciary is beginning to get involved as dozens of court cases are underway, challenging President Donald Trump’s tariff moves (and other policies). Additional important feedback comes from public opinion, which is souring, and corporate lobbying, which is in high gear and getting results in the form of exceptions and pauses in the implementation of new policies. U.S. capital markets provide the most immediate and important feedback for policymakers.
Treasury tantrum turns heads
What stands out for us in April is the reaction in the U.S. Treasury market. We see this as the most important feedback loop thus far. U.S. long bond yields rose enough in early April to get policymakers to change their hardline tune. Governments don’t own stocks, so equity market declines are tangential feedback. Governments borrow money in the bond market; the U.S. borrows a lot. Rising bond yields have a direct impact on government finances.
U.S. long-term bond yields rose in April, but not for reasons primarily related to inflation or economic growth, drivers that investors are generally familiar with and understand. Yields rose on concerns over the safe-haven status of the U.S. That status, plus the greenback’s widely accepted role as the world’s reserve currency, are referred to as the “exorbitant privilege” of the U.S. That privilege has been earned over decades (centuries, in fact) of the U.S. being a beacon of stability. The benefit to the U.S. is lower borrowing costs for the government than otherwise would be the case. The foundations of U.S. financial stability are the foundations of a well-functioning democratic capitalist system. This stability requires an adherence to the checks and balances that are embedded in the Constitution, a commitment to price stability (low and stable inflation), and the supremacy of the rule of law.
When central bank independence is perceived as threatened, investors turn to world history and see a commitment to price stability being threatened. The U.S. as a place where the rule of law reigns supreme feels threatened when the administration muses about ignoring court rulings. Unelected officials cutting departments and programs previously authorized by Congress feels like Congress isn’t performing the oversight role of the executive branch defined in the Constitution.
It’s not the policies, it’s the method
It’s not our intention to debate or politicize these issues; our opinion isn’t what counts. What matters is the global perception of these strong institutions and traditions at the heart of why the U.S. enjoys exorbitant privilege.
In April, there was a hint that perception could be weakening, that the greenback’s role in the global economy might be declining. In our view, the issue is less about the merits of various policies and more about the strength of the system itself. People want to see that if changes are made, they are done within the framework the world has grown to trust for close to 250 years.
The most important thing – The message got through
To us, the actions that followed the rise in U.S. bond yields are the most important thing. The response is evidence that this vital feedback loop is working. Tariff proposals have been paused or dampened, talk of trade deals has increased, and the President’s criticism of the Federal Reserve was dialed down (but not eliminated). We also saw legal actions moving through the courts, members of Congress regularly talking about tax reform, and even the head of DOGE planning to return to his day job. As a result of these shifts, U.S. government bond yields mounted a solid retreat.
Where do we go from here?
The path ahead is uncertain. It remains to be seen to what extent the U.S. administration’s proposed changes become a lasting reality, and the timeline for that to happen. Once there’s more clarity, we can begin to assess how long it will take for businesses and consumers across the U.S. and the globe to react and adapt to the new landscape.
We note that key feedback loops are beginning to respond more vigorously, which is an excellent sign. In the months ahead, we may need to endure some additional feedback in the form of capital market volatility as more policy tweaking unfolds. We remain confident in capitalism’s ability to morph and adapt. For these reasons and more, we remain willing and active participants in the capital markets – controlling what we can control, namely our emotions and behaviour. As always, we will thoroughly scrutinize the ever-changing dynamics in order to understand both risks and opportunities.
Our strategy – Balanced, still an equity bias, tilting more neutral
Our portfolios are well-balanced, and all our portfolios, including our all-equity and equity-focused portfolios, are well-diversified. We have kept our allocations to equities in check over the last two-and-a-half-year bull market by regularly trimming stocks to buy bonds. In many portfolios, this happened as recently as mid-February. Broad-based Canadian fixed income, while slightly negative by 0.7% in April, is up 1.4% for the year, continuing to provide ballast to balanced portfolios.
Additionally, throughout the bull market, we rebalanced regional equity weights several times, again as recently as November and mid-February. This discipline of maintaining exposure to Canadian and international stocks is bearing fruit year to date.
Staying the course is not inaction
Given the current choppy environment, where currents and winds are shifting rapidly, often swinging 180 degrees, and buffeted by unpredictable factors, we are choosing to keep our trading activity restrained. Do not mistake this patience for paralysis engendered by fear or uncertainty; we continue to carry on, using our disciplined, process-oriented, iterative approach that has stood the test of time.
Early April saw us execute part of an evolving structural change we are implementing in some of our models. In light of early April’s market volatility, we faced a decision on these long- planned scheduled trades. Should we proceed, or cancel the trading activity? We decided to execute. The trading turned out to be short-term fortuitous. That was a welcome outcome, but it wasn’t the motivation. The decision was anchored in our enduring commitment to forward-thinking. We asked ourselves this question: are we confident our clients will be better off well into the future if we do this today? Our answer was yes. We share this not to brag, as we will never be perfect, but to highlight a concrete example of how we strategize and act on our clients’ behalf in the heat of market volatility. Decisions aren’t guesses; nothing is knee-jerk. Everything we do is supported by careful examination, drawing on the vast array of experts at our disposal (the advantage of being an elite arm of an award-winning, global financial services provider enables us to draw on a deep bench strength of expertise).
Don’t freeze
Decisions we make on your behalf are only one part of your investment success. The choices you make are a key component. Fear and uncertainty tend to provoke a “freeze” response. However, time waits for no one; your cash flows, needs, goals and risk tolerance evolve. Perhaps your situation doesn’t require adjustment. But if you are in the process of making changes to your investments based on your circumstances, please do not let uncertainty hold you back. Don’t be frozen; reach out to your BMO Private Wealth professional to help determine the best path forward. They can offer a well-thought-out, methodical approach implemented over a time frame tailored to you. Generally speaking, the best course of action is to keep calm and carry on.
The last word – Is there any shelter?
We believe that the best shelter in the current environment is reliance on our strategic asset-allocation framework. While every situation features unique circumstances, asset allocation is a combination of two pieces: the strategic asset mix that suits your individual circumstances, selected with guidance from a BMO Private Wealth Investment Counsellor, plus tactical tilts that allow for deviation from that asset mix.
The most important variable in determining an individual’s investment success is strategic asset mix. Our strategic asset mixes have been built using a combination of best principles and research that have stood the test of time. Tactical deviations from the strategic asset mix are well researched, informed by experts and our experience. The goal of a tactical asset mix is to enhance return outcomes or reduce risk – ideally, a blend of both.
Using the analogy of sailing, a strategic asset mix is the construction of the ship and sails, and tactical is how the sails are set. You need the boat to stay afloat and the sails to propel you. Adjustments to the sails by the captain are tactical moves to pick up some wind (enhance return) or steer away from rocks and shoals (reduce risk).
Currently, we’re engulfed by a gale. Seas are rough, winds are shifting quickly in unpredictable directions. In this environment, a good captain battens down the hatches. Now is not the time to pick up the wind; it’s too fickle. Nor is it the time to tinker with the route. Already set on a good tack, away from shoals and rocks, a good captain keeps two hands on the helm and stays the course. That’s what we are doing. Given the significant amount of information to digest, the tempo and frequency of meetings and collaboration among our experts is elevated. We have extreme confidence in our ship and sails; they are holding up well.
As always, we are monitoring our asset mix, which is understandably bobbing around, buffeted by daily and intra-day market movements. Just as a good captain doesn’t erratically adjust the helm in response to every wave, we exercise patience while ensuring we remain on a prudent course. When Bob Dylan sings about everything seeming unresolved and the place where it’s always safe and warm, we think of strategic asset mix. “Come in,” she said, “I’ll give you shelter from the storm.”
Please contact your Investment Counsellor if you have any questions or would like to discuss your investments.
