Speaker 1:
On July 10th, BMO hosted a bank-wide digital event entitled North American Trade Deals Outlook. Guest speaker Ernie Tedeschi, Director of Economics at Yale University's Budget Lab, and former chief economist at the White House Council of Economic Advisers, joined a panel of BMO experts to discuss the outlook on trade agreements between major global economies and how they could fundamentally affect international business and growth risks. Let's take a listen.
Speaker 2:
Welcome to Markets Plus, where leading experts from across BMO discuss factors shaping the markets, economy, industry sectors, and much more. Visit Bmocm.com/marketsplus for more episodes.
Camilla Sutton:
Hello, and welcome. I'm Camilla Sutton, MD and head of equity research for Canada/UK for BMO Capital Markets. Certainly the news flow on tariff has been rapidly changing, and given how important it is, we wanted to take the opportunity to discuss with experts where we are and what it means for investors. I'm really pleased today to be joined by three excellent panelists who will help us put it all in perspective, and we start by introducing our panelists. We have Ernie Tedeschi, Director of Economics at Yale University Budget Lab and former chief economist at the White House Council of Economic Advisers. We have Michael Gregory, Deputy Chief Economist at BMO, as well as Mike Miranda, head of investments, BMO Private Wealth North America. Why don't we kick it off with you, Ernie? Can you walk us through where we are with tariffs, trade deals and the outlook for trade, maybe as far out as September?
Ernie Tedeschi:
Absolutely. First of all, thank you for having me. Just in the last two weeks we've seen a flurry of tariff news, after roughly a month where things seemed to be calmer. We have a not deal but framework between the U.S. and Vietnam that sets tariff rates with Vietnam at 20%. We had an announcement of 50% commodity tariffs on copper into the United States that President Trump announced on July 8th, and then last night he clarified that those would go into effect on August 1st. Then we've had a very high-profile set of 22 letters sent to various countries raising so-called reciprocal tariff rates, including to Brazil, raising their rate to 50%. Most of these rates other than Brazil's align with the April 2nd, so-called Liberation Day tariffs, but there are some countries still missing from the letters that we haven't heard about yet, such as India.
The way that I like to boil this down is, when you take everything that's been announced up until this morning into account, the average effective tariff rate in the United States is 18%. To put that in perspective, we started the year at 2.5%. An 18% effective tariff rate is the highest it's been in the U.S. since 1934, since the days of the Great Depression and our Smoot-Hawley tariffs. That's an average cost per household of $2,400 in the United States every year. If you assume full passthrough to consumers with no Fed reaction, that raises prices by nearly 2%, 1.8%, over the next one or two years or so, and in particular, they're going to hit commodities that are more likely to be imported, as you might imagine, things like apparel and electronics.
The last thing I'll say is that in the short run, this is a major headwind to the United States. When we at the Budget Lab do macroeconomic modeling off of them, we shave roughly 0.7 to 0.8 percentage points off of 2025 growth as a result of these tariffs. Note that that's not a recession, so if you were at 2% for the U.S., you would be at the low 1s now, which is a major headwind, but that's not a recession. I think that if we're wrong, we're likely to be wrong in the sense that our predicted effect is too small, because what we can't capture is the uncertainty effects of tariffs. Why don't I stop there?
Camilla Sutton:
That was a great summary. Thank you for that. Michael, why don't we turn to you? Can you set the stage for how both the U.S and the Canadian economies have reacted so far and what you expect from here?
Michael Gregory:
Well, we inherently expected that we would get a huge stagflationary shock to both economies, slower growth, faster inflation, and theoretically we understand how the mechanisms work is through purchasing power erosion in the U.S., largely to hit the exports and business investments in Canada. Fortunately a little snag came in as we went along, in the fact that we had a behavioral change in anticipation of tariffs. Consumers were pre-buying. Businesses were stockpiling. We had these huge swings in trade because of importing and exporting, and that has delayed or distorted the ultimate stagflationary impact of tariffs.
Now, where we are right now in Canada, it's pretty clear things have settled down from that initial wave of pre-buying, but the economy is definitely weakening. We see that broadly in GDP growth, in jobs related to the trade sector, so that's definitely weakening. We expect that to continue, and we actually see stubbornness on the inflation side. It's not clear how much of that is actually due to tariffs. It's kind of muddled right now, but it's definitely a concern for the Bank of Canada. We seem to be at a stagflationary theme unfolding for Canada.
For the U.S., however, we have yet to really see in the main channel how tariffs work through in terms of slowing the economy down through purchasing power erosion. Prices have been benign, so far at least, and as we know, the Fed is waiting to see what happens. As a result, the U.S. has hung in there a little bit better, but I think it's only a matter of time before not only the U.S. succumbs to tariffs in terms of weaker growth and faster inflation, but Canada continues to succumb to that.
I know Ernie just gave his quick little snapshot of his forecast. Being also an economist, I have to give what we're thinking too, and to put it in perspective, on January 31st, which was our last pre-tariffs forecast, we had U.S. growth at 2.2%, fourth over fourth. We're now at 1%, so we shaved about a percent off of growth for this year, and we have inflation about a percentage point higher. In Canada we've shaved even more. We had 2% growth. We're down to about a half a percent with inflation not going up as much, about a half a percent overall, simply because of the weaker growth helping to dampen inflation. We are getting that stagflationary impact, at least we're expecting it to unfold as the rest of the year happens.
Camilla Sutton:
Mike, you might have the hardest job here. Can you walk us through the market reaction, what we've seen to date?
Mike Miranda:
Yeah, absolutely, Camilla. When I think about the market reaction, I think one word comes to mind, and that's resiliency. It certainly didn't feel like that in the peak of uncertainty that came out of tariffs in early April, but maybe I'll give you a perspective on what equities have done, what bonds have done, and maybe the linkage, importantly, to what that's meant for currencies and principally the U.S. dollar.
It's interesting. You come into 2025 and the market was pretty excited about some of the pro-growth initiatives, the continuation of what was two very good years for equity markets. We all remember double-digit growth in '23, double-digit growth in '24, so we came into '25 out of the gates pretty strong. We had all-time highs in February for many markets. They were up anywhere from 5 to 10% earlier this year and then obviously April 2nd came, and you saw most markets adjust pretty rapidly over a couple-of-day period.
The U.S. certainly took the majority of that move. If you look from that, April 2nd to April 8th, before we started to get some of the pause on some of the tariffs, you had the S&P in the U.S. down almost 20%. You had the TSX down well into double digits, 13% or so, and even things like Europe down 14, 15%. Then obviously we had the pause and we've had multiple pauses along this journey, but from that April 8th period on, we've certainly seen a recovery in markets here. We sit at the S&P 25% off of those lows that we saw in early April. We have the TSX up over 20%. We have IFA, so Europe, Asia and Far East, up very strongly over that period as well. If you strip out the U.S. year to date right now, the rest of the world is actually doing really quite well. I always look at something like the All Country World Index, ex U.S., and it's up 16% year to date. Now, the U.S. is doing well as well. We're up over 7% in the U.S. if you look at something like the S&P 500, but quite a volatile path over that period, so resiliency, certainly, in the equity markets.
If I think about the bond markets, resilient as well, and range bound, I would say. If you look at something like the U.S. 10-year, we had an immediate pulse down lower, that flight to quality that you oftentimes see in periods of dislocation, that the U.S. 10-year will get below 3.9%, and then I'm sure we'll talk about it, but you had some concerns about budgetary issues and debt issuance, and spiked up significantly higher to well above 4.5% in just a couple-of-day period, and we've been pretty much range bound since then. There's this tug of war, I think, in the bond market, where you have, per what Michael just talked about, slower growth, higher inflation, a Fed likely cutting, potentially some higher-growth aspects as it relates to productivity and AI and the like. It's keeping, I think, the bond market in that range.
The last thing I would say is maybe on the currency front. That's been the one that probably hasn't been as resilient. We've seen equities go down and back up, bonds go down and back up. The currency has been pretty much the same story over this period, and that's a period of dollar weakness, so USD weakness. Just to put it in some perspectives, this is an environment where all G10 currencies, so all of the major 10 largest currencies against the U.S. dollar, are stronger against the U.S. dollar year to date. It's not an environment where you have some doing better, some doing worse. It's by and large a U.S.-weaker backdrop. You have the euro up well into the double digits for the year. You have many currencies, even those that are commodity linked and might be struggling based on some of the commodity weakness that we've seen, up mid single digits for this perspective.
We oftentimes get questions as to why. A lot of people thought that, coming into this year, that the economic textbooks would tell you that if you put tariffs on, there is a capital flow and a trade flow that actually might have your currency move higher. We see it as probably three or four reasons why the U.S. dollar has been weak. First of all, I think it's helpful to step back and look that we've come off a period over the last decade or so where the U.S. dollar has been strong, so it's a little bit of giveback from that period that we've seen post-GFC, capital flows into tech that we all know over the last couple of years.
The other thing that I would say is there's some structural things that I think the market's trying to digest, perhaps. This concept is will the U.S. dollar be the reserve currency over the longer term. I don't see risk to that over the near term, but there's certainly those who are better concerned about the role of the dollar in the global economy over the much longer period. You could look at something like gold to see how nice of a run that it's had this year. I think there's concerns about Fed independence, which always has a factor there as to how the market wants to think about rates and the currency as well. Then I'm sure we'll talk about it, but there's this whole obviously fiscal landscape in the U.S. with budget deficits pretty high, debt profile pretty high, and just some concerns about what that means for the U.S. backdrop.
Camilla, I think you're right. It's been a very challenging backdrop, but the resiliency of the major markets in equities and fixed income has been quite surprising.
Camilla Sutton:
That was a great rundown. Thanks, Mike. Ernie and Michael, the headlines just keep coming fast and furious. Sometimes it's hard to separate the noise from what we should really be focused on. Maybe if you could both give us, starting with Ernie, from your perspective, what really is the most important tariff-related development that you're watching for right now?
Ernie Tedeschi:
There are several of them. I think first and foremost, the impact on consumer spending is the one that I am looking at, and that's pretty straightforward, particularly in the U.S. data. I think even more important than that, though, is the amount of price passthrough that you see, and you heard Michael refer to this a little bit. Tariffs are ultimately going to be paid by American consumers and businesses. The question will be how much is eaten by the business in the form of lower profits, how much is passed on to consumers in the form of higher prices. One should not take comfort in the idea of businesses eating tariffs, because even if tariffs are not fully passed through to consumers, it still means lower profits for businesses, less investment, less hiring. There are macroeconomic consequences to that.
I think on the price passthrough front, it's clear that so far, price passthrough has not been 100% of the tariffs to consumers in the United States. There are lots of reasons for that. I think the biggest reason is that tariffs are not fully biting yet. We know from U.S. government revenue data that the average effective tariff rate in actuality in June was 9.7%. That's based on the revenue take-up that the American federal government got versus a policy rate of 16% that month. Just over half of where it should have been, and that's because tariffs, there were many pauses during June.
Consumers and businesses are strategic about when they buy and timing. As you heard from both Mike and Michael, there was a lot of front-running of tariffs beforehand, and so purchases that would've been made in June by consumers were made earlier in the year or even late last year. Going the other way, as you heard from Mike, is currency. Econ 101 tells you that when you put tariffs in place, you get an appreciation of currency so long as there's not perfect retaliation, and we've obviously seen the opposite in the United States right now, where currency is weaker than it was even on Election Day, so that should be making import prices more expensive for American consumers.
That said too, you've heard more and more this sense that there has been no price impact from tariffs, from administration officials and from some commentariat, and that's clearly wrong. If you look at electronics prices in the United States, they have broken with prior downward trends and they are higher. Durable goods in the United States, which tend to go down in price over time, they had fallen by 0.6% through May of 2024. Now they are up by 1.2% through May of this year, a complete reversal of what's normal for durable goods. I'm not saying all of that is due to tariffs, but tariffs are probably a major driver of that.
I think the biggest mystery in the price passthrough data, and the debate is why apparel in the United States has not seen more of a response. Apparel inflation has been subdued, and apparel should be among the most sensitive, particularly to the China tariffs that the U.S. has placed, but you haven't seen extraordinary inflation in apparel. Again, it's early. I think probably the likeliest explanation is that big retailers in the United States built up inventory beforehand and so those tariffs are not affecting current retail prices, but that's within the most important thing for me. That is, narrowly, the single most important category that I'm looking at, is apparel, particularly as we get into August and we have back-to-school shopping season in the United States.
Camilla Sutton:
Michael, just curious from your perspective in terms of what the most important tariff-related development you're watching is.
Michael Gregory:
Sure thing. I'll take a different tack from what Ernie said, for the sake of not repeating him. I look from an administrative standpoint. There's some very critical dates that we're fast approaching, and the first of those is July 21st, when supposedly that is the deadline for a new Canada-U.S. economic and security pact. They'll call it a trade pact, but I think it's going to go beyond just trade. What's going to be in there? What are the implications of that for the renegotiation of CUSMA or the USMCA? Big question.
Then we get to July 31st, which is just only 10 days later, and that is the day that the Appeals Court will take oral arguments on the legality of using the International Emergency Economic Powers Act as the justification for tariffs. Whatever the outcome of that, I suspect in a few days afterwards, this is bound to go to the Supreme Court. Unless we forget, August 1st is reciprocal tariff day two, and either that's going to be extended further if the trade deals are going well or it's going to kick in.
Finally, although it's gone by the radar, August 12th is when the U.S.-China trade peace ends, and we could go back to reciprocal 145% tariffs. Don't know. There's a lot of uncertainty unfolding. One would hope that the summer would be quiet, and it's not going to be quiet on the trade front.
Camilla Sutton:
No holidays for you three. Ernie, why don't we drill down a little bit here into trade? How do you think about the impact of tariffs on GDP and employment, drilling out some sectors in particular, manufacturing, construction, agriculture, mining?
Ernie Tedeschi:
Yeah, so I think in the short run, so over say the one- to two-year horizon, tariffs are a demand shock, and they're going to play out in the American economy very much like a typical demand shock. Like I said before, we don't think that it rises to the size of a recessionary demand shock, at least not by itself, but it's a major one. We had GDP shrinking, GDP growth lower by 0.7 percentage points. This year, I think a forecast of shaving off a point is very reasonable and in a similar vein to that, especially taking into account uncertainty effects, which are very hard to incorporate into modeling. We translated our GDP effect into an increase in the unemployment rate of 0.4 percentage points, shaving off about half a million jobs by the end of the year. Those will be pretty evenly spread out across sectors, as you might expect from just a general demand shock.
Over the longer run, tariffs take on more of a supply-side shock implication, so they start affecting things like productivity. Firms invest less in emerging technologies as a result of tariffs, and so that flows through to workers' pay, to growth, to CapEx, over time. That's not the sort of effect that we would expect in 2025 or 2026, but that's what weighs on the economy lower. We have the United States economy persistently smaller, by 0.4 percentage points over the long run.
When you look at sectoral detail, there's actually I think a very interesting tradeoff that's going to happen here, which is that there will be some reshoring back to the United States. Probably not a lot, but there will be some. Moreover, some of the demand for in particular durable goods in the United States that did go to imports will shift to domestic industries. When we crunch the numbers at the Budget Lab, we think that, long-run, manufacturing sector output specifically will expand by 2%. I should say, when I say long-term, I'm talking five to ten years.
That is more than overwhelmed, however, by the negative effects on other sectors. There's a beggar-thy-neighbor effect happening within the United States economy. Construction output shrinks in the United States by 3.6%, which I think will have major implications on things like housing supply in the United States. Agricultural output is down by almost 1%. Mining and extraction, including oil, is down by more than 1% in the long run. Manufacturing does manage to expand, but it does so at the expense of other sectors of the U.S. economy such that net/net, the U.S. economy overall is down.
One other thing within manufacturing, advanced manufacturing ... so computers, semiconductors, et cetera ... that is not up. That is down by more than 2.5% in the long run as a result of these tariffs, we find. You do get some overall manufacturing boost, but not the highest-paid manufacturing jobs in the United States. There's just not enough capacity for output in that industry to rise over the long run.
Camilla Sutton:
Those are really interesting dynamics by the sectors. Michael, let's switch back here to central bank policy for a minute. How do tariff dynamics feed into how central banks, particularly the Fed and Bank of Canada, are thinking about the future?
Michael Gregory:
Well, as we've been mentioning already, tariffs are inherently a stagflationary shock, which does make central banks' jobs a lot harder because it puts upward pressure on inflation, puts downward pressure on growth. If you're the Fed, that has a dual mandate of maximum employment and stable prices, well, that makes things a little bit ... Bank of Canada has just only one mandate officially, which is price stability.
We saw towards the end of last year, the Fed began to ease rates. We got a hundred basis points of cuts over the last three meetings. The Bank of Canada was also cutting rates. We got a full 175 basis points by the end of last year. Then we began this year, got through Inauguration Day, but with the release of the America First trade policy memorandum, we all realized we're going to have a huge source of uncertainty and potential tariff hit coming down. That caused enough uncertainty to keep the Fed very much on hold ever since. The Bank of Canada, realizing that there was much more of a concern about the growth hit and the potential disinflationary impact of that growth hit, they took out a little bit of insurance and went a couple more times to start this year, but they too are now on hold.
Both central banks on hold. Bank of Canada is looking to see whether or not that little bit of stubbornness on inflation, is it really tariffs? Is it persistence? Maybe if it's not, we can resume cutting rates again, and the Fed is just waiting to see whether or not. That inevitable increase in the broader price indices, yes, I agree. We're selectively starting to see some pressures, but broadly, not so much, and wait to see how that happens.
We do think that as the summer unfolds, we will get the evidence that the central banks want to see, which is that the inflation, full passthrough is there on the inflation side in the U.S. to some degree, but the economy is also weakening, and again, trading off these two offsetting goals. The Bank of Canada, we do think that we will get the weakness in the economy finally begins to dampen what lingering inflation pressures there are.
Both central banks have their next meetings on the same day, July 30th, end of month. Whether or not they go, we don't think the Fed will. We in the past thought the Bank of Canada would, but to be honest with you, I think we have to see literally a very weak Labour Force Survey report, which is due tomorrow, and then later, unequivocal evidence of disinflation in the CPI report for the Bank to go, and we'll see if the data confirms. If not, I think we're probably looking at September rate cuts by both central banks, and again on the same day.
The bottom line, I do think we'll get a resumption of rate cuts, but I do think, with the Bank of Canada policy rate already in that neutral range, the Bank of Canada can be a little more bit more relaxed about the whole process. They realize they want to ease further as the economy's weakening, but monetary policy's already in the neutral range. The Fed, however, we're looking at a policy rate which is more than a full percentage point above its neutral level, and therefore, as long as we get some evidence that things are proceeding in some controlled way on the inflation front and with growth weakening, I do think that jobs side is going to just tilt things a little bit from the Fed's policy perspective, if only just to keep policies being so restrictive. I do think we're going to get further rate cuts, but perhaps not until the very end of the summer.
Camilla Sutton:
Mike, let's get you back into the conversation here. You have markets pricing in potential risk. Do you think they're pricing the risk of tariffs in the future correctly? On the back of that, what kind of asset classes or sectors are most vulnerable if we do have more tariffs or less tariffs?
Mike Miranda:
Yeah, those are great questions. I guess if I step back and think about what the market's pricing in, I laid it out at the beginning. The markets have met or moved higher relative to the highs that we set earlier this year. I think the market's base case right now is that we will have tariffs, right? Those aren't going to go away, that we will get some more certainty on where those ultimate tariffs land, that there will probably be some sort of base rate very similar to that 10% that is out there right now, that there will be pockets of tariffs above that, whether it's country tariffs like we have in China, or some of the sectoral tariffs that we started this call out by talking about.
That's what the market is pricing in right now. I think that's reflective of where we think things land, so it's not too mispriced relative to the market's expectations. There's a lot of uncertainty certainly out there, that we have to think there's going to be some volatility, right? It's been actually amazing to see, especially over the last month, month and a half, how well the market's digested some of the uncertainty and some of the either extensions or pauses, or adding some of these sectoral tariffs.
I think what's important to think about from the market's perspective is that they can be at times very different from the underlying economy. We say this often, that markets aren't always the economy. They very inherently try to be forward-looking. Here we are in the middle of 2025, so the markets are looking at the rest of 2025, well into 2026. I think what markets need more than anything is some clarity on where that lands. It doesn't have to go away, but it has to have some clarity. I think what we've seen over the last month and a half or two is the market pricing out some of those tail risks that were maybe in the initial landscape of April 2nd.
When I sit back and look at why is the market doing as well as it has, amidst all of these very great points that we think about from the economic side ... slowing growth, inflation likely being a bit elevated, so that classic stagflationary environment ... I think it's looking forward to the future. What does that look like? I think we have an earnings landscape that is coming down from where probably we came into 2025, but still positive. I looked earlier today. The market is expecting, one year out, low double-digit earnings growth for going into 2026, so that's certainly supportive of the markets. You have ... Michael Gregory just mentioned it right now ... you have the market pricing in, at least in the U.S. landscape, some of that higher rate structure coming down, so almost four cuts from the Fed sometime over the next year, likely starting later this year. The market has, if you go into next summer, four cuts priced in, so that's a backdrop.
Then we haven't talked about it because this call certainly is more focused on the tariff landscape, but we have some of those pro-growth initiatives that the market was so focused on earlier in this year. Maybe a reopening of the IPO market, M&A, some of the pro-growth initiatives that we've seen in the One Big Beautiful Bill as it relates to R&D expensing and the like. There's a host of pro-growth initiatives that the market is looking to price in into the future, offsetting some of this near-term uncertainty as it relates to tariffs, and pricing that in as it relates to where valuation should be.
I think your other question about how do we think about navigating this backdrop is a good one, what would do well, what wouldn't do. If we saw an escalation in tariffs closer to where we were in the early April period, there's not very many places to hide on the equity front. I outlined that at the outset. The U.S. did not do well. Other markets did better, certainly globally, than the U.S., but in that peak period of uncertainty, they were all lower, right? That's something to think about, is the fact that ... and that's not our base case ... but if you did see a significant escalation in tariffs relative to what that market is pricing right now, that would put some pressure on equities.
We do think, specifically within equities, we do like things like infrastructure and the like that we think, medium, mid-term and longer-term, still have a thesis. There's some added benefits now that you think about, from some of the R&D expensing and capital expenditures there that we think is positive for the market, but again, it's still against the landscape. If tariffs were to get significantly escalated, it would be a challenge for the equity markets.
I do think bonds could actually hold up reasonably well in an environment where tariffs start to get priced higher or we saw less dealmaking on that front. I talked about it a little bit at the outset. We did see that flight to quality early in that volatility, and then it evaporated. Why did that evaporate is because the market was really concerned about some of the fiscal landscape, debt issuance and the like.
The fiscal landscape in the U.S. is not, certainly, great. We have $36 trillion in debt. We're running budget deficits at six-plus percent, but we do have the One Big Beautiful Bill behind us, so there's at least some clarity for the market to digest as it relates to what the fiscal landscape is and what that means for potential issuance over the next year. With that behind us, in the risk case scenario where tariffs did move significantly higher, I think that natural diversifier in the portfolio and that flight to quality for bonds would actually materialize like we saw on that April 2nd, 3rd and 4th early downdraft.
Camilla Sutton:
Well, that's really helpful, Mike. Thank you for that. Well, half an hour certainly goes quickly. Why don't we just sum it up here, a minute each? Ernie, Michael, Mike, could you just close it by what is the message you'd like to leave investors with today?
Ernie Tedeschi:
I think the major message for me is, look, treat tariffs seriously, but don't treat them existentially. As I've said multiple times, I don't think, as they are right now, they are a recessionary shock to the United States, but they're a major headwind and so you need to treat them seriously. Follow the data and be patient would be the other one. There is a lot of uncertainty still about the price passthrough, as we've talked about, versus the profit impact of tariffs.
There's a lot of questions about the consumer impact, the ultimate impact on currency, and on different types of asset classes. It is still relatively early on in the process. Remember that Liberation Day was April 2nd. We're only a few months out from that. When the United States imposed its highest-ever tariff, the Smoot-Hawley tariff in 1930, it took three years for tariffs to reach their ultimate peak as a result of that policy. We still have a lot of time to actually see the full consequences of the policy that's been put in place.
Camilla Sutton:
Michael?
Michael Gregory:
Sure. If I had to give a message, particularly to businesses, Canadian businesses, I would say diversify and verify. Diversify in the sense that there are other markets other than the U.S., and you think back to Trump 1.0 and those first two years. What came into effect was an internal Canada free trade agreement, a free trade agreement with Europe, and a free trade agreement with the Pacific Rim. Unfortunately, they got pushed to the wayside when the negotiator of USMCA sucked all the oxygen out of the room. Well, we'll be renegotiating NAFTA into the USMCA. I think now we should be looking at that again.
The federal government is pushing hard on the internal trade. I think there are limits to how much we can get from that, but definitely on the verification side, because a lot of Canada-U.S. trade under the USMCA was tariff-free anyway, but we weren't very good about compliance because we didn't have to be. Compliance costs you something, and it was a zero tariff or very low tariff anyway. I do think we've seen businesses really ramp up their efforts to verify, and smaller businesses are having a lot harder time with that, smaller exporters. There's more work we can do on that, but keep up the pressure. Diversify, verify, and hopefully we can skate through this.
Camilla Sutton:
Mike?
Mike Miranda:
Yeah. I'd focus on three things and one is diversifying, so I'll come back to that. I talk to our clients on a daily basis, and what I'd say is three things I'd leave them with and others. One, try to separate the emotional aspect of these tariffs from the fundamentals. I find that this environment is emotionally charging, and so focusing on the fundamentals is critical as it relates to, from my perspective, how you position wealth and how you navigate the market backdrop. Second, I'd say focus on the medium- and longer-term fundamentals. Markets are incredibly difficult to time over the near term. While you may feel like it's clear where things are going to go over the next month or two, markets oftentimes surprise you. Anchoring towards the medium- and longer-term drivers and how that relates to how you position portfolios is important.
Then the last thing, and very similar to what Michael Gregory said, diversification is key in this environment. We came off of a last couple of years where increasingly, it felt easy to be allocated to large-cap stocks within certain regions, and even just a subset there where the returns were so outsized, and it felt like that, for many investors, was the way to manage wealth or manage portfolios. This environment of heightened uncertainty and a shifting landscape is demonstrating first and foremost the benefit of that diversification. Equities, bonds, and within equities that geographical and sectoral diversification, is providing a ballast for people to navigate this landscape.
Camilla Sutton:
Ernie, Michael, Mike, thank all three of you very much for sharing your views with us today. In complicated times, it's been really nice to hear how you're thinking about the markets, the economy going forward. Here at BMO, we're committed to helping you, our clients, even in the most complex environments, with our extensive cross-border resources, expertise and content. Your BMO relationship manager is obviously very happy to help if you have any questions. We're really glad you were able to join us today. Thank you very much.
Speaker 2:
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Speaker 1:
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