Key Takeaways May 2025
Canadian Markets Lead Performance
The TSX Composite is up 6% year-to-date, with a significant 16% rebound off April lows. Canadian equities outperformed U.S. peers thanks to strength in energy and financials, attractive valuations, and improved sentiment under a new, business-friendly government.
Mixed Results in the U.S.
U.S. indices show weaker performance: Nasdaq +1.3%, S&P 500 flat, and Dow down 1.3% year-to-date. Volatility persists due to tariff threats and fiscal uncertainty.
Europe Stabilizes
European equities recovered following a delay in U.S. tariffs on EU imports. However, the European Central Bank warned of systemic risks linked to global trade tensions.
Geopolitical and Trade Developments
Trump Tariffs Overturned (Temporarily)
A U.S. federal court blocked the proposed “Liberation Day” tariffs, ruling they exceeded presidential authority. The ruling helped ease market tension, though the administration’s appeal keeps uncertainty elevated.
Global Trade Tensions Remain a Drag
Despite short-term relief, trade headlines continue to weigh on market sentiment globally, especially in the U.S. and Europe.
Central Bank and Interest Rate Updates
Bank of Canada Holds Rates Steady
The BoC held its policy rate at 2.75%. Governor Macklem warned of recession risks extending into 2027 due to ongoing global instability.
U.S. Federal Reserve Holds, Stresses Caution
The Fed maintained its benchmark rate at 4.25–4.50% and signaled a cautious, data-driven approach moving forward, with no near-term rate cuts expected.
Fixed Income and Yield Curve Trends
Steepening Canadian Yield Curve
In Canada, 2-year bond yields fell while 10-year yields rose, steepening the curve — typically a signal of long-term growth optimism but also inflation risk.
U.S. Yield Volatility
U.S. 10-year Treasury yields briefly spiked to 4.80% after a weak bond auction and credit downgrade but have since settled around 4.47%. The brief inversion of the 2s/10s curve signals recession concerns.
Corporate Credit and Spread Insights
Spreads Widen Across Riskier Sectors
Credit spreads have widened, especially in technology, transportation, and consumer sectors — reflecting investor caution and rising perceived credit risk.
Why Credit Spreads Matter
A widening credit spread signals higher risk premiums demanded by investors. This trend is being closely monitored as a real-time indicator of market sentiment and financial stress.
Manager Strategy and Portfolio Adjustments
- Shift Toward Higher Quality and Liquidity
- Managers are focusing on investment-grade, short-duration bonds and reducing exposure to high-yield or illiquid securities.
- Equity Exposure Adjustments
- Portfolios are favoring high-quality, cash-generating stocks while cutting exposure to cyclical and high-debt names.
Spread Monitoring for Tactical Moves
Spreads are being used as signals for real-time asset allocation adjustments in response to market shifts.
Portfolio Positioning and Defensive Strategy
- Defensive and Diversified
The investment team continues to emphasize high-quality fixed income and dividend-paying equities, particularly in Canada.
- Fixed Income as a Stabilizer
Bond holdings in the 2–10 year range offer cash flow and reduce overall portfolio volatility.
- Strategic Use of Derivatives
A put-writing strategy on U.S. Treasury ETFs (IEF and TLT) enhances income while maintaining a conservative posture.
- Global Diversification Maintained
Portfolios include selective European exposure to capture rebounds from easing trade pressures.
Closing Remarks
Stay Invested, Stay Selective
May’s market behavior reinforces the value of disciplined, selective investing. Volatility will persist, but active risk management and long-term focus remain central.