Key Considerations for Investors as Markets Surge

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.

Disclosures

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