Key considerations for investors as markets surge

Transcript

hello everyone and welcome to Market weekend review for the week ending February 14th 20125 my name is B Chen Linn I'm a senior investment strategist and head of Canadian strategy here at Russell Investments on today's market week review there are three major topics we're going to discuss first with Equity markets hitting all-time highs or hovering close to all-time highs in several regions what should investors keep in mind second what are latest tariff developments here in the US and the potential implications that investors need to know finally we're going to do a bit of a preview onto next week's Canadian inflation numbers does the inflation data here in the US necessarily translate one to one onto the Canadian inflation data and ultimately what are the implications for the Bank of Canada so first let's talk about the equity markets this week we saw the S&P 500 and the us hover close to its all-time high and we saw the TSX composite index in Canada also hover close to its all-time high in addition the stock 600 index in Europe broke through its all-time high yet again and so if so many Equity market indices hovering near or above their all-time highs some investors might be wondering is this time to chase into the equity Market rally well from our perspective here at Russell Investments the answer to that question question is no we do not believe that investors should Chase into the equity Market rally instead we think that investors would benefit from staying disciplined and staying close to their strategic asset allocation we think that macroeconomic uncertainty continues to remain elevated even though in the US we think that a soft Landing is the most likely outcome we also think that recession risks still remain somewhat above average in addition equity valuations in the US are likely somewhat on the stretch side when we look outside of the US it's true that equity valuations in Canada and Europe for instance are closer to fair value than they are in the US but there's the offsetting factor that Canada and Europe are more exposed to cyclical risks and for Canada if some of these tariffs against Canada are implemented after the 30-day pause then the Canadian economy could see a very elevated risk of an economic slowdown and so when you balance these cycle and valuation factors together we just don't see a compelling enough tactical case at this point in time to overweight Equity now we also think that investors don't need to sell out of their Equity Market exposure or underweight equities from a tactical perspective but instead we think that sticking close to the middle close to their strategic asset allocation rebalancing their portfolio is probably something that can benefit investors so they can lock in some of the gains they've made but also have the opportunity to participate still in any potential future Equity Market upside from here on in the second topic tariffs so there's obviously been a lot of announcements on this front this week we saw more announcements president Donald Trump held a press conference this Thursday where he discussed his plan for reciprocal tariffs on key us trading partners but what really stood out to me about his announcement was he didn't announce a specific tariff rate he didn't announce a specific tariff that he was going to Target and he also didn't announce a specific deadline as to when some of these new tariffs would go into effect he only instructed his advisers to study the situation and make some recommendations before April 1st so it doesn't necessarily mean that we're going to see these additional new tariffs by April 1st we think that this is an important development in terms of how president Trump introduced the plan for reciprocal tariffs because it gives a lot of latitude a lot of flexibility to him and his advis ERS and ultimately we think that these tariff talks might be more of a negotiating tool rather than something to be taking literally of course we do need to continue to monitor the situation as we've discussed in the past if some of the US tariffs were to be implemented the US would likely see a modest drag on growth and a modest onetime hit to prices whereas some of the US's key trading partners like Canada and Mexico could potentially be more impacted by tariffs finally we're going to talk talk about inflation so this week in the US we saw consumer inflation surprise to the upside some people might be wondering does that mean that inflation in Canada is also going a surprise to the upside when it gets released next week the answer is no even though the Canadian and the US economies are so interconnected they don't always move one to one in lock step with each other and at the end of the day we think the Bank of Canada now is going to be a lot more focused on the growth side of the equation rather than the inflation side of the equation so even if we were to get a slight up side surprise to inflation the Bank of Canada might look through it as more of a one-time shock and we ultimately think they're going to still continue cutting interest rates later this year because of the weakness we've seen in the Canadian economy thanks for tuning in stay tuned for more episodes of market weeken review hi I'm Sophie Anto head of portfolio and business Consulting at Russell Investments if you liked what you just saw and heard consider subscribing to our YouTube channel or check us out on LinkedIn thanks for tuning in

Executive summary:

Equity markets are hovering near all-time highs in the U.S., Canada, and Europe
The U.S. announced plans for reciprocal tariffs
The Bank of Canada is likely to continue cutting rates

On the latest edition of Market Week in Review, Senior Investment Strategist and Head of Canadian Strategy, BeiChen Lin, discussed what investors should consider in light of recent equity-market strength. He also provided an update on the latest U.S. tariff announcements and assessed the outlook for rate cuts in Canada.

As equity markets soar, what should investors think about?

Lin began by noting that several major equity benchmarks hovered close to or surpassed their record highs this week, including the S&P 500 Index, the S&P/TSX Composite Index, and the STOXX® Europe 600 Index. This has led some investors to wonder if now could be a good time to chase into the equity-market rally, he remarked.

“From our perspective at Russell Investments, we don’t think so. Instead, we believe investors would benefit from staying disciplined and close to their strategic asset allocations,” Lin stated. One of the key reasons why is because macroeconomic uncertainty remains elevated, he said. This is the case even in the U.S., where an economic soft landing looks like the most likely outcome, Lin noted. “I believe recession risks in the U.S. are still somewhat above average,” he said. U.S. equity valuations also look somewhat stretched, Lin added.

He noted that equity valuations look closer to fair value in places outside the U.S.—such as Canada and Europe—but that these cheaper valuations are offset by higher cyclical risks. For instance, if the U.S. administration decides to move ahead with its initial plan to tax Canadian imports at a 25% rate, the Canadian economy could face an elevated risk of an economic slowdown, Lin observed.

All told, Lin said that when today’s cycle and valuation factors are balanced together, he doesn’t see a compelling enough tactical case to overweight equities. Instead, by sticking close to their strategic asset allocations and potentially rebalancing, investors could lock in some of the gains they’ve made and still have the opportunity to participate in any potential future equity-market upside, Lin said.

U.S. trade policy update

Switching to U.S. trade policy, Lin noted that President Donald Trump held a press conference on Feb. 13 to discuss plans for reciprocal tariffs on key U.S. trading partners.

Of note, the president didn’t get into specifics about which countries would face these tariffs, what the tariff rates would be, and when some of the tariffs might go into effect, Lin said. Instead, the Trump administration will study the situation and make some recommendations by April 1, he noted, adding that this doesn’t necessarily mean the U.S. will implement new tariffs then.

“At Russell Investments, we think this is an important development, because it gives the U.S. administration a fair amount of flexibility. We believe these reciprocal tariffs might be more of a negotiating tool, but the situation requires careful monitoring,” Lin said. He finished by noting that if these or the other tariffs proposed by the administration are implemented, the U.S. would likely see a modest drag on growth and a modest one-time hit to prices. Meanwhile, some of the country’s key trading partners, like Canada and Mexico, could potentially be impacted to a much greater degree, Lin said

Growth vs. inflation: What’s a higher priority for the Bank of Canada?

Lin wrapped up with a look at the inflation backdrop in Canada, noting that the January numbers will be published by Statistics Canada on Feb. 18. He said that although the U.S. CPI (consumer price index) surprised to the upside in January, that doesn’t mean Canadian inflation data will necessarily come in hot as well. “Although the Canadian and American economies are very interconnected, they don’t always move in lockstep,” Lin remarked.

He said that even if Canada’s inflation report for January comes in slightly stronger than anticipated, the Bank of Canada (BoC) might look past it, treating it more like a one-time shock. The reason why is that the bank is likely to be more focused on boosting growth instead of taming inflation, Lin said. “Ultimately, given the weakness in the Canadian economy, we expect that the BoC will continue cutting rates in 2025,” he concluded.

Watch

Listen