Financial markets

• The rude shock of negotiations and changes to the world order have given way to a form of resilience and, above all, the expectation that the situation will evolve in the right direction despite everything.
• Markets are still reacting, albeit less sharply, to announcements such as the one on May 30 concerning steel tariffs: they now assume that the final negotiated tariffs will be lower and that the statements made are negotiating tactics. A dynamic has been established: the initial proclamation and then, a delay, an exemption.
• There is, however, a risk of complacency on the part of the markets, a situation that our managers are closely monitoring.
• Finally, these first six months underscore what market history teaches us: it’s extremely difficult to predict major movements. That’s why it’s important not to react on a day-to-day basis and to adopt a broader perspective to correctly assess the real impact of announcements.

The duration of the uncertainty and the size of the tariffs will determine whether the situation is sustainable for the economy with just a slowdown, or whether there will be more significant consequences in the medium term.

• The best scenario: 10% tariffs for all countries. It’s a form of tax and countries adjust, they redefine their trade levels and trade relations are stable. All companies know the new standard and can plan accordingly. This scenario would incorporate a certain level of tariffs, and even if it remains negative, it will be possible to find accommodations between import prices, taxes and slightly higher inflation.
• Less optimistic scenarios: much higher tariffs that have a significant impact on global trade, or prolonged uncertainty that creates an economic slowdown due to the inability to make decisions or to continue to do business. These scenarios would imply lingering uncertainty and a reduction in trade, or higher tariffs, which could not be absorbed without a sharp economic slowdown.

• In the medium term, stock markets tend to rise or fall according to companies’ overall financial results. If all the U.S. administration’s announcements are detrimental to earnings, but not permanently, the markets will hold up.
• At present, the U.S. market is resilient, but companies are treading water: they are delaying certain projects and anticipating lower, but not catastrophic, earnings.
• Elsewhere in the world, markets are doing better. For example, European markets, particularly Germany, have rallied and are becoming more attractive to investors.

• Although they may not seem to exert a major influence, bond markets are just as, if not more important, because they are linked to governments’ ability to finance their activities. Companies depend on the bond markets to borrow at a reasonable cost, which has a direct impact on their earnings and, consequently, on their stock market valuation.
• At the beginning of the year, Donald Trump’s accession to power created a certain frenzy and expectations of rate cuts and excellent economic performance.
• What followed didn’t live up to expectations: yields on 10-year U.S. Treasuries exceeded the psychological threshold of 4.5% on several occasions due to the need to further compensate investors for the prevailing economic uncertainty.
• Since early May, the uptrend in bond yields has been driven by excessive deficits and government debt: the bond market is demanding spending control.
• In terms of credit spreads, however, we’re back to where we were at the start of the year, with even tighter spreads in some cases. In concrete terms, this means that the market perceives less risk of default and is optimistic about borrowers’ financial health. We’re seeing a craze for the corporate bond market the likes of which we haven’t seen for a long time.

• As far as rate cuts are concerned, inflation data (current or expected) don’t justify any major cuts on either side of the border: even in Canada, with rates around 3%, it’s hard to see further cuts, or even one or two.
• In the United States, the Federal Reserve (Fed) could cut its key rates if data show signs of economic weakness. Despite the fact that Donald Trump is constantly calling for rate cuts, Governor Powell will however have to wait for the real impact of the measures put forward by the US administration to materialize before justifying such cuts.

• Bonds and fixed income have reached a significant level of value in terms of diversification and current yield to generate steady, predictable income. Depending on your investor profile, holding fixed income therefore brings a form of stability to your portfolio, and is complementary to equities.
• In recent years, there has been a tendency to concentrate investments in U.S. equities: however, the past six months have served as a reminder of the place in the portfolio of assets from other countries or regions to achieve better diversification, as opposed to over-concentration in the U.S. market.
• Economic policies could lead to a resurgence of interest in Europe and other parts of the world, such as Asia, Japan or emerging markets.
• Opportunities do exist, however, in the U.S. market, where there are still some very attractive companies.
• The current dispersion and volatility are created by sensational news that is neither sustainable nor differentiated, since it hits all industries, without distinction. It takes no account of the quality of companies or their governance, and does not allow for comparison within a given sector.
• Your investment managers are there to separate the wheat from the chaff and to identify quality stocks with sustainable prospects over time.

• Maintain diversified exposure to global markets.
• Don’t neglect bonds, because they’re starting to look more attractive in terms of yield, even European bonds.
• Because everything has moved so fast, we can easily experience the best and the worst within the same month, which is why it’s important to stay the course with your investment strategy.
• We note that most of our clients have not deviated from their strategy, which has been fortunate: May was the best month since 1990 in terms of S&P 500 returns, and since 1997 for the Nasdaq.
• Exiting the market when times are tough means missing out on the rebound and rally that inevitably occur.