Q1 2025 review: analyzing the impact of tariffs and geopolitical dynamics

As the locals tend to say about the weather in Scotland, with an air of bemused resignation, “If you don’t like the weather, wait five minutes.” It’s a sentiment that many investors can relate to in light of the current trading environment.

The heightened sensitivity to this geopolitical landscape is reflected in the recent spike in the Global Economic Policy Uncertainty Index (GEPU), which tracks the frequency of mentions of certain words and terms that are used to describe and explain economic policy. It’s perhaps no coincidence that the Cboe Volatility Index (VIX)―the market’s go-to index to gauge market volatility―is strongly correlated with the GEPU. 

As a result, after two years of limited volatility—barring a brief spell last summer—investor appetite for risk assets has decreased. Equity markets in North America suffered during the first quarter: The S&P 500 Index, S&P/TSX Composite Index, Nasdaq Composite Index, and Russell 2000 Index were 4.6% $USD%, +0.8% $CAD, –8.3% $USD, and –9.8% $USD, respectively, during the quarter.¹

There were some areas of positivity, however, as Europe and China fared much better, with the MSCI Europe Index and the MSCI Asia Pacific ex Japan Index respectively ending the quarter +5.3% $EUR and +1.4% $USD higher.¹ It was as though investors took their proverbial ball out of North America and decided to play elsewhere.

European markets were supported by changing attitudes toward additional fiscal spending among policymakers, leading to improved growth expectations. News that Purchasing Managers’ Indexes in the eurozone region for both the manufacturing and services sectors have come off extreme lows also added to momentum. Chinese equities benefited from Beijing’s renewed focus on domestic growth.

On the fixed-income side, there are signs that the negative correlation between stocks and bonds may be strengthening. North American fixed income had a relatively positive quarter: Canadian and U.S. bonds measured by the FTSE Canada Universe Bond Index and the Bloomberg U.S. Aggregate Bond Index respectively gained +2.0% $CAD and +2.8% $USD in the first three months of 2025.¹ In our view, this highlights the important role that bonds typically play in asset allocation decisions as a tool to mitigate volatility. 

How we’re thinking about the markets

If it feels like we’re repeating ourselves, that’s because we are, but some messages are worth repeating. In periods of uncertainty, investors should ask themselves whether the situation is likely to be disruptive or destructive in nature. We believe the current backdrop is more likely to be disruptive, like the many other geopolitical developments that we’ve experienced in the past.

Policymakers may be planning to use tariffs as a tool in future trade negotiations. In our view, while it could be part of an effort to secure leverage in eventual trade talks with Canada, things may not be quite so straightforward. We highlight three critical areas that help support a strong argument in Canada’s favour. 

1 The auto industry

• A car can cross the U.S.-Canada and/or the U.S.-Mexico border as often as eight times throughout the manufacturing process. According to reports, tariffs could cause car prices to increase by up to $12,000 for some models.²
• Canada exports roughly 1.5 million cars to the United States.³ Building car manufacturing capacity isn’t just a capital-intensive undertaking―it also takes time. The process is likely to take years and may well lead to disruptions in the interim.⁴
• A report suggests that if U.S. automakers were to move manufacturing activities back to the United States, it would likely lead to higher prices. In the longer term, labour costs could increase 10%, while light-vehicle sales may decline by the same percentage.⁴

2 Oil

• Many U.S. refineries are designed to process Canada’s heavy crude, Western Canadian Select (WCS). Of 130 U.S. refineries, 25 use Canada’s WCS (roughly 20%).⁵ If they went offline, it’s reasonable to assume that U.S. consumers would see a sharp increase in gasoline prices.
• Fifteen years ago, about 140,000 barrels of Canadian oil made their way to the United States daily. Today, the number is closer to 450,000 barrels because of improved pipeline infrastructure. Oil transportation is much less efficient for oil imported from outside North America.⁵

3 Potash

• Canada is the world’s biggest producer of potash, a key ingredient in fertilizers used in crop farming, followed by Russia, Belarus, and China.⁶ The United States, as it happens, imports some 85% of its potash from Canada.⁷
• Potash production in Russia and Belarus has fallen in the past few years due to geopolitical events,⁵ a development that may make it challenging for U.S. farmers to find alternative viable sources of potash in the short term, which could translate into higher prices for U.S. consumers. 

We believe that the Trump administration judges its performance by the health of the U.S. economy and the stock market, and chances are that, at some point, the administration will seek to negotiate a solution with their counterparts. What that will take―a sustained pullback in the stock market, or even a bear market―is impossible to know. One thing that’s clear to us, however, is that as of the end of the quarter, we’re not near crisis levels yet.

Stock market corrections are both very common and very difficult to predict. Since 1980, the likelihood of the S&P 500 Index slipping into correction territory (i.e., a drop of 10% or more) within a calendar year is higher than 50%, and the average market retracement amid a sell-off in any given calendar year is ~14%. The broader context against that eye-catching data is that the market has historically stayed in the positive column roughly 78% of the time for the calendar year, posting an average return of ~10%.

With policy uncertainty likely to remain heightened in the near term, outbursts of market volatility will likely continue. So what should investors do in times like these? Our response, once again, may sound familiar and, potentially, a little boring: In uncertain times, we believe that investors should focus on solutions that are more targeted to downside protection than trying to capture upside risk.

When you’re at the height of the storm, it can be difficult to remember that sunny days might be just around the corner. Storms, however, do end. What’s important is to remain calm until they do.

1 Bloomberg, as of March 31, 2025. Returns for the S&P 500 Index, Nasdaq Composite Index, Russell 2000 Index, MSCI All Country Asia ex Japan Index, and the Bloomberg U.S. Aggregate Bond Index are in U.S. dollars. Returns for the S&P/TSX Composite Index and the FTSE Canada Universe Bond Index are in Canadian dollars. Returns for the MSCI Europe Index is in the euro. 2 “Trump to impose 25% tariff on all imported vehichles and foreign-made auto parts,” NBC News, March 26, 2025. 3 “How do Trump’s tariffs affect Canadian business? We answer your questions,” www.theglobaland mail.com, March 21, 2025. 4 “S&P Global says auto industry has 1 week before massive production halt due to tariffs,” Detroit Free Press, March 13, 2025. 5 “Explainer: Why Canadian oil is so important to the United States,” Canadian Energy Centre, January 30, 2025. 6 Potash facts, Government of Canada, February 2, 2025. 7 “What is potash and why is the U.S. dependent on Canada for it,” National Post, March 9, 2025.