Was February the month the market finally began to push back against Trump 2.0? To say the world hasn’t been its usual self for the last while is a massive understatement. Every day, the headlines seem to increase in absurdity, to the point that no one even knows what to believe anymore.
Yet financial markets have largely looked past this and remained near all-time highs. But that may be changing as more of the assumptions this rally has been built on are being questioned.
Anyone who was paying attention to the first act of President Trump was well aware of what was coming in the sequel. The playbook on how to trade in this environment was loaded into trading models around the world, and investors were bullish.
We would expect wild headlines but could be comforted with the understanding that they were really just a tool to get another party to the bargaining table. It was also understood that the performance of the equity market was the measurement of his success. And with that as a backstop, you knew the threats could be reversed the minute the market began to stumble. It was basically known as “the Trump Put.”
That testing by the market might be what is happening as we enter March. Tariff threats are increasing even though it’s broadly understood they aren’t really going to help anyone. Add to that the potential for massive DOGE layoffs in Washington, and you have the potential for a weaker economy. This isn’t what many signed up for when they voted for less regulation and more growth.
The bond market seems to have picked up on this first. The US 10-year bond yield, which touched 4.8% in January, has now pulled back to 4.2%. Rate cuts that had been removed from expectations are being put back in.
In Canada, where many are waking up to the fact that Americans are no longer our friends, we are now on the verge of a recession. The hockey win was nice, but the economy is a mess. As a result, the Bank of Canada looks ready for additional rate cuts, and the Canadian dollar looks to be heading lower.
With valuations near historical highs, for markets to move higher, it was always going to come down to earnings growth. The recent earnings season has come and gone, and on the margin, it has been better than expected, with revenue and earnings ahead of expectations.
However, guidance has been disappointing and more cautious. Even more concerning, we are beginning to hear more comments questioning the strength of the US consumer. Again, this wasn’t in the playbook a few months ago and is causing more investors to question their original gameplan.
We all know markets hate uncertainty, and uncertainty is what we have. No one can predict the next headline, and unfortunately, this is happening at the same time economic data is softening. These facts had largely been ignored until a few weeks ago, yet they’ve now caught everyone’s attention.
So where do we go from here? Economic data needs to start improving, or we will be hearing more fears of a stagflation environment. This feeling of uncertainty is starting to take a toll on many. Investor sentiment is now approaching the levels of bearishness normally reserved for when we are fully into a financial crisis. This is setting up for a tricky environment over the coming months.
Putting it together, investors are bearish, previous winners are being unrelentingly sold, economic data is slowing, and markets are beginning to roll over. This is the perfect setup for the market to test Trump to get him to change this tone, and we should expect that this month.
March can be a volatile time, and we shouldn’t expect it to be much different this year. The good news is that much of this uncertainty can be reversed with a few policy changes. Unfortunately, we just need to get past the test that will cause this shift.
— Greg Taylor, CFA, is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
"By the numbers" displays the total returns for the month of February 2025.
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