We’re halfway through 2025, and there’s one thing we can say for sure: It’s been anything but dull.
Between the epic market swings, tariff soap opera and geopolitical tensions, it was a masterclass in unpredictability and managing emotions. Investors saw one of the most dramatic equity market selloffs in recent memory, but those who stuck it out also enjoyed a spectacular rebound.
President Trump got the ball rolling by announcing aggressive tariffs against major trading partners in April. His “Liberation Day” economic strategy shocked investors due to its scale, speed and unpredictability.
Within days, trillions of dollars in equity value vanished across the globe, as François and I discuss in our latest Capital Topics podcast.
Canada’s S&P/TSX Composite Index plunged 12.2%, the MSCI EAFE developed-market index lost 13.2% and the S&P 500 Index in the U.S. shed 14.7%.
(To see market data and our model portfolios, visit our Capital Topics website’s resources section or our team’s page on the PWL Capital website. Our model portfolios can be a good tool for readers to evaluate their own results.)
Especially significant was the negative reaction of the bond market. Normally, when stocks fall, investors turn to the safety of government bonds, which pushes yields down and bond prices up.
But this time, the opposite happened. Yields increased and bond prices went down. Investors were concerned that the tariffs would spark inflation—fears amplified by growing U.S. federal deficits.
Reports suggested that the bond yield spike is what forced President Trump to pause the tariffs only a week after they were announced. This resulted in the biggest single-day equity rally since 2008. The S&P 500 Index surged 9.5%, the Nasdaq jumped 12% and the Dow Jones Industrial Average gained 8%.
This rollercoaster ride is a perfect example of why we don’t try to time the markets. If an investor had sold when the tariffs were announced and didn’t reinvest when markets bottomed, they would have seriously damaged their portfolio.
It’s a great reminder that reacting emotionally can be costly and undermine your investment performance. As we’ve said many times over the years, market timing is not a strategy our readers should follow.
As though to underscore this lesson, investors were tested with plenty of alarming news, including the war in Ukraine and the U.S. attack on Iran’s nuclear facilities. The latter caused a 16% spike in the price of crude oil, followed by an equally sharp drop once a ceasefire agreement eased market fears.
Amid this chaos, many central banks are cautiously shifting to easing to support growth as inflation moderates. In Canada, inflation sits at 1.9% versus 2.7% in June last year. This helped the Bank of Canada reduce its benchmark interest rate from 3.25% at the year’s start to 2.75%. Canada’s economy is growing, albeit at a slow pace—1.3% year-over-year.
In the U.S., the situation is somewhat different, with inflation rising to 2.7% in June, prompting the Federal Reserve Board to keep the fed funds rate unchanged so far in 2025 at 4.5%.
Turning to the markets, fixed-income yields in Canada and the U.S. remain well above average. The 10-year government of Canada bond yield was roughly 3.3% at the end of June, while the U.S. 10-year Treasury note yield was 4.4%. Relatively high yields continue to be good news for investors with a large bond weighting in their portfolio.
Stock markets have shown surprising resilience given the geopolitical and tariff turbulence. In Canada, the S&P/TSX Composite Index shot up 10.2% in the first half of the year.
The strong performance particularly stands out because Canada has been at the centre of President Trump’s negative rhetoric on tariffs.
Markets in the U.S. saw dramatic swings, with the S&P 500 and Nasdaq both in bear market territory in April after losing more than 20% since their prior highs. But then came the rebound, and the S&P 500 has now hit new all-time highs.
After all this volatility, the total U.S. market was up 5.8% year-to-date at the end of June in U.S. dollar terms. In Canadian dollars, it’s up just 0.2% because of strong gains for the loonie versus the greenback.
The U.S. dollar’s decline this year has been another big story. The greenback has fallen 10.8% against a basket of major currencies due to the trade instability, U.S. deficit concerns and other factors.
Meanwhile, international equities have performed well. The MSCI EAFE developed-market index has gained 13.2% in Canadian dollars year-to-date, while emerging market large and mid-cap stocks rose 9.5%.
Overall, investors had plenty of reasons to be nervous this year so far. But those who stayed invested with diversified global portfolios were handsomely rewarded.
We saw once more that the markets are a great teacher. They show time and again that discipline and a patient focus on the long term pay off.
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Find market statistics, model portfolios, more commentary, past blog posts, eBooks and podcasts on the website of PWL Capital’s Parkyn-Doyon La Rochelle team and on our Capital Topics website.
