Q1 2025: A fast and furious start to the year
If the first quarter of 2025 were a movie, it would probably be another installment of the Fast and Furious movie franchise. The unanswered questions surrounding potential tariffs on Canada, Mexico, China, and Europe have indeed come fast and furious, leading to much uncertainty and volatility in the markets.
As the locals in Scotland say, “If you don’t like the weather, wait five minutes.” It’s a sentiment that many investors can relate to in light of the current environment.
Market turbulence and geopolitical uncertainty
The increased focus on geopolitical issues is evident in the rise of the Global Economic Policy Uncertainty Index,1 which measures how often certain words related to economic policy are mentioned. It’s no surprise that this uncertainty index closely aligns with the CBOE Volatility Index (VIX), a common gauge of market volatility.
After two years of relatively stable markets, except for a brief period last summer, investors now seem to be less interested in riskier investments. As a result, North American equity markets suffered during the first quarter. The S&P 500 Index, the Nasdaq Composite Index, and the Russell 2000 Index were down 4.6% USD, 10.4% USD, and 9.8% USD, respectively, while the S&P/TSX Composite Index was up 0.8% CAD during the quarter.2
Finding opportunities in global market shifts
There were some areas of positivity, as Europe and China fared much better. The MSCI Europe Index rose by 5.3% EUR for the quarter, while the MSCI AC Asia ex Japan Index increased by 1.4% USD.3 It seems that investors moved their focus away from North America to explore opportunities in other regions.
European markets benefited as policymakers shifted their attitudes towards increased fiscal spending, boosting growth expectations. Reports showed that the Purchasing Managers’ Index in the Eurozone’s manufacturing sector has rebounded from previous lows, further adding to momentum.4 Meanwhile, Chinese equities gained as the government renewed its focus on stimulating domestic growth.5
On the fixed income side, there are signs that the negative correlation between stocks and bonds may be strengthening. During the first quarter of 2025, North American fixed income performed well. Canadian bonds, tracked by the FTSE Canada Universe Bond Index, and U.S. bonds, measured by the Bloomberg U.S. Aggregate Bond Index, rose by 2.0% and 2.8%, respectively. 6 This highlights the important role that bonds play in investment portfolios, serving as a tool to help reduce volatility.
How we’re thinking about the markets
If it feels like we’re repeating ourselves, that’s because we are. But some messages are worth repeating: In periods of uncertainty, investors should ask themselves whether current events are more likely to be disruptive or destructive. We believe the present situation is more of a disruption, similar to many other geopolitical events we’ve encountered before.
We believe that the Trump administration judges its success based on the U.S. economy and the stock market. Chances are that they will eventually pursue negotiations with other countries. While it’s unclear whether this will require a sustained stock pullback, or even a bear market, we believe that, as of the end of the quarter, we’re not near crisis levels yet.
When you’re at the height of the storm, it can be difficult to remember that sunny days might be just around the corner. Storms, however, do end. What’s important is to remain calm until they do.
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Sources: 1 https://www.policyuncertainty.com/global_monthly.html 2WSJ and Yahoo Finance. As at March 31, 2025. 3Bloomberg. As at March 31, 2025. 4Purchasing Managers’ Index, S&P Global, April 1, 2025. 5Yahoo Finance. As at March 31, 2025. 6Bloomberg. As at March 31, 2025
The Global Economic Policy Uncertainty (GEPU) Index is measured based on purchasing power parity-adjusted GDP of 21 countries. The S&P 500 Index tracks the performance of 500 of the largest companies in the United States. The S&P/TSX Composite Index is the benchmark Canadian index that tracks the performance of companies listed on the Toronto Stock Exchange (TSX). The NASDAQ Composite Index is a market-value-weighted index that tracks the performance of all stocks listed on the NASDAQ Stock Market. The Russell 2000 Index tracks the performance of 2,000 small-cap companies in the United States. The MSCI Europe Index tracks the performance of large-and mid-cap stocks of developed-market companies in Europe. The MSCI Asia-Pacific ex Japan Index tracks the performance of large- and mid-cap stocks across developed-market countries in the Asia-Pacific, excluding Japan. The Bloomberg U.S. Aggregate Bond Index tracks the performance of U.S. investment-grade bonds in government, asset-backed, and corporate debt markets. The FTSE Canada Universe Bond Index tracks the performance of the Canadian dollar-denominated investment-grade fixed income market, covering Canadian government, quasi-government and corporate bonds. It is not possible to invest directly in an index. Past performance does not guarantee future results.