Q1 2025 Market and Performance Update | Investing in a Trump 2.2 world

My year-end 2024 update emphasized that we should ‘Expect the Unexpected’ in 2025. Three months into the year, what we have learned so far can only re-enforce this message. 

From Trump 2.0 to Trump 2.1 to Trump 2.2 and Beyond

Referring to Donald Trump’s second term in office as ‘Trump 2.0’ was popular amongst authors of various publications following his election.  But within days of his inauguration, it quickly became clear that even though everyone expected him to govern differently than this first term, the extent to which he would lever Executive Orders and the wide-ranging topics to which they would apply was a surprise.  The equity market bump of January was quickly eroded as Trump 2.1 emerged during February.  The Trump administration’s announcements regarding tariffs and other related topics were consistently inconsistent.   Announcements and proclamations regarding other topics (including key geopolitical topics such as Russia-Ukraine) oscillated as well.     

Now that we are into the 3rd month of his term, it’s fair to argue that we are now onto ‘Trump 2.2’.   The erratic pattern of announcements continues and that certainly frustrates financial market participants.   But for many who observed Trump’s positioning and re-positioning on topics such as tariffs as the foundation of a broader negotiating strategy, it is time to consider a world where the Trump Administration isn’t looking to negotiate anything and simply is going to do what they’re going to do.   

Where will North American equity markets go from here? 

Financial markets (equity markets in particular) very much value predictability.   From our perspective, it is fair to say that the unpredictability of the Trump administration was the primary driver of negative US equity market performance in Q1 2025: 

  • Consumers, producers, and wholesalers have scaled back given the uncertain nature of tariffs and other Republican policies; 

  • Lower equity market prices have emerged as equity traders struggle to forecast future earnings and sales; and 

  • US corporate earnings for Q1 were generally OK.  The decline in the US stock market was much greater than any disappointment in earnings and reflected, in part, the overvalued nature of the ‘Magnificent 7’ group. 

Looking ahead, we believe that the specifics of the Trump administration’s tariff policies are less important to go-forward equity market performance than the consistency of their implementation.    Equity prices will likely remain depressed until the Trump administration picks a path and sticks to it.   

The Trump Administration announced a wide range of sweeping tariffs after the market closed on April 2nd.  As is often the case with their announcements, there was a mix of conviction, uncertainty, and confusion within the Liberation Day discussion.   Our initial assessment is that the April 2nd announcement will do little to limit equity market volatility but that it certainly wasn’t a ‘worst case’ scenario, especially for Canada and Mexico. 

So what drove WealthCo investor returns during Q1 2025? 

Following 5 consecutive strong quarters dating back to Q4 2023, diversified WealthCo portfolios took a breather in Q1 2025.    As often is the case during short-term equity volatility, WealthCo’s fixed income portfolio was the best performer during the quarter. Both Alternative funds posted positive returns during the quarter.    The positive impact of these 3 funds was offset by negative performance of the Equity fund.    Given all of the noise and angst from south of the border, we believe that is a reasonable result.   

What lies ahead? 

As I discussed in our last update,  short-term forecasting in this environment is unlike any that we have ever experienced.  The new paradigm (which I now call Trump 2.2) is defined by its unpredictability and potentially low correlation with economic fundamentals.    

Going forward, at a high-level, I see a few different plausible paths:

1. Relentless Resolve of the Trump Administration 

While the messaging of the Trump administration is markedly inconsistent, its underlying conviction continues to amplify.  We must now acknowledge that it is now plausible that Trump is willing to sacrifice the US economy in the short-term in order to re-organize global trade order in the long-term in a manner which he perceives to be more favourable to the United States.   

This scenario would be a key departure from Trump 1.0 where he continually looked to the performance of the US stock market as a key measure of his overall success.   But over the last few weeks, it is becoming more apparent that the Trump administration doesn’t appear to be influenced by the stock market.  And with increased regularity, patterns are emerging where the Trump administration is showing little concern for rising inflation, the US consumer, and recession risks. 

There is little support for this approach amongst independent economists. That having been said, the conviction amongst Trump’s team is high and united.   There are so many key questions associated with this scenario, including: 

  • How much pain is the Trump administration willing to endure to take the US and global economy down an unexplored and uncertain path?  Their plan cannot work without the buy-in of the US private sector who, for the most part, are so far very reluctant to make massive capital investments without both a). massive subsidies and b). clear certainty that they and their shareholders will be rewarded for years after Trump’s term ends. 

  • How will the international community respond?  The US’s tariff strategy is more likely to succeed with limited retaliation from others.  But what happens if the tariff war escalates further? The impact on the US dollar and its aggregate trade deficit is less likely to be aligned with the Trump Administration’s objectives if foreign countries retaliate. 

  • How will the average American respond?  The Trump Administration is ruling very much via Executive Order with limited concern about how the House, Senate or Democrats will respond.  They are very much levering their majorities along with the disorganization of the Democrats.    How important will approval ratings be in the short-term?   How frustrated could Americans be if a recession occurs in 2025 that is primarily the doing of their President? 

  • How will Corporate America respond?  The Trump Administration is very much counting on American businesses to significantly increase domestic capital expenditures and investments.  But will US companies ‘play ball’ without significant (and expensive) subsidies?  Building factories, initiating new energy exploration, and establishing new US production which can only survive with high tariff barriers may well be a very risky proposition for US companies who have witnessed rapid oscillation of the Trump administration’s trade policies in the first 3 months of Trump 2.2.  And for those industries where investments will take years to build, how confident are they that by 2028, the next US president will continue the current tariff policy going forward?   

2. Tariffs Threats are a ‘Means to an End’ and Drive Negotiated Agreements  

Throughout his lifetime, Donald Trump has been a negotiator.  His propensity to negotiate hard, make outlandish demands, and finalize agreements that are much more favourable than perhaps otherwise achievable are well-documented. 

Durable trade agreements (the US/Mexico/Canada Trade Agreement for example?) Or to drive larger commitments to NATO or defence from other partners?  Or achieve other objectives? 

Negotiating more beneficial solutions following massive tariff threats is certainly a scenario that would mitigate the short-term pain on the US consumer as well as the US economy.  But new challenges continue to emerge with regard to this scenario: 

  • How likely are foreign trading partners going to agree to new agreements?  What level of trust will they have that the United States will honour new agreements? 

  • Will the Trump Administration back down for their long-term broad objectives?  Their short-term oscillation on tariff policy during February and March led to fairly muted responses from financial markets.   Their messaging associated with ‘Liberation Day’ certainly opened the door to future negotiations, albeit on a very uncertain path.  Will Trump and his team be able to back off their promises yet again and still claim victory?    

Positioning of the WealthCo funds in Q1 2025 

Despite all the uncertainty, I’m pleased with the positioning of our portfolios as we drive forward for the following reasons: 

  • The foundation of the US economy remains relatively sound.  Unemployment is low and both inflation and interest rates are reasonable.   Despite the uncertain nature of its government, the economy and outlook for the United States remains stronger than any other around the world. 

  • The portfolio’s cash position is modestly higher than average as we end the quarter.  We ended the quarter with few clues on what ‘Liberation Day’ was going to look like, but with plausible scenarios that the equity market reacts favourably as well as plausible scenarios to the contrary.   We have dry powder available while balancing downside risks.  

  • We reduced our exposure to US small cap equities during the quarter to diversify more globally.  Our direct exposure to Canadian equities remains modest (~10% of the Equity portfolio).   

  • Despite plenty of day-to-day volatility at times, the CAD/USD exchange rate ended the quarter relatively unchanged.  Foreign investors have surprised the Trump Administration with their willingness to dump US securities which has weakened the US Dollar.   There are certainly plausible scenarios for both a stronger as well a weaker Canadian dollar going forward.   

  • The broad diversification of the portfolio remains its most defining and important characteristic: 

    Core Equities: We reduced the fund’s overweight to Small Cap during the quarter to diversify more globally. Exposure to the ‘Magnificent 7’ remains modest. 

    Alternative Income:  The loan portfolio is very well diversified.  It should perform well in a stable interest rate environment. 

    Alternative Growth:  The fund is extremely well diversified across issuer and underlying investments. While we continue to expect incremental valuations as transaction volume returns to normal, the uncertainty generated by the Trump administration has muted upward valuations anticipated in Q1 2025. 

    Fixed Income:  Credit quality is high and the fund’s duration is slightly lower than it’s benchmark.  A modest return emphasizing capital preservation is a reasonable expectation given consensus interest rate views.  The portfolio performed well in Q1 2025. 

With over a decade of experience in managing pools that include bonafide Alternative investments, we remain confident that our disciplined and deliberate approach will continue to deliver the long-term results our investors seek. Our commitment to limiting short-term volatility while providing consistent returns underscores the strength of our model. We deeply appreciate your trust and support and look forward to helping you achieve your financial goals.  

Wishing you all the very best as we navigate these uncertain times.