While record inflows into US equity funds and foreign buying are fueling hope among retail investors, drastic US tariff hikes, a collapse in US household wealth and a historic loss of confidence among Canadian small businesses are looming as of April 2. For those who don't feel like reading and just want to know what to do now, the short summary is at the bottom.
The Chart 2 shows how Canadian small business sentiment has fallen to an all-time low lower than during 9/11, the 2008 financial crisis or COVID. The Canadian Small Business Confidence Index is an economic indicator that measures the sentiment and confidence of small and medium-sized businesses in Canada. It provides information on how optimistic or pessimistic entrepreneurs are about the current and future economic situation. The index is typically determined through regular surveys of SMEs and asks about sales expectations, investments, the employment situation and the overall economic outlook. The index is regarded as a leading indicator for economic development, as SMEs react quickly to economic changes.
This slump is no coincidence, as the index is reacting to the economic downturn described in Chart 6 announcement that US tariffs will rise from 2-3% to over 10% from April. Canada, 75% of whose exports flow to the US, is already feeling the effects of this, an alarm signal for global supply chains, which are increasingly burdened by protectionist measures. What is meant by protectionist measures? In short, it means that the USA wants to protect domestic industries, safeguard jobs and reduce trade deficits.
At the same time, the Chart 3 shows the strongest foreign selling of US equities since March 2023, due to 3 factors.
- The Federal Reserve continues to hold interest rates at a high level of 4.25-4.50%. At its meeting on March 18-19, 2025, the Fed left the Zinsen unverändert and signaled that it remains cautious. The forecasts for interest rate cuts were maintained, but economic uncertainty has nevertheless increased.
- Another factor would be tax tightening. In other words, the government could raise taxes or cut subsidies. The former will not happen directly with income, but will happen differently; the latter is currently happening. Cuts of at least 880 billion US dollars over 10 years in Medicaid, Medicare, etc. Repeal of the Affordable Care Act (Obamacare), which could lead to savings of up to 560 billion dollars and the closure of the Department of Education.
- The imposition of new tariffs, such as the 25% tariffs on steel & aluminum imports, could be seen as an indirect form of tax hike as they increase costs for businesses and consumers.
Foreign investors held 24 16 trillion US dollars in American equities (Chart 4). A good sign of confidence in American stocks. The current sales are therefore small in comparison and should be interpreted more as a gasp for air. This is of course driven by Donald Trump's tariffs and foreign policy.
Thanks to rising share prices after the pandemic, the wealth of US households rose by 9 trillion US dollars (Chart 5), a boom that was fueled by Wealth-Effect consumption (70% of the US economy!). The value of equities rose in 2024 by 9 trillion US dollars (Chart 5), driven by the post-COVID rally. Bank of America now expects a loss of USD 3 trillion in Q1 2025, which would result in frugal consumption, lower corporate earnings and thus a driver of unemployment. At the same time, the inverse yield curve could increase borrowing costs and further burden households, similar to 1950. The combination of asset losses, expensive credit and trade conflicts could send the US into a downward spiral. downward spiral downward spiral. The emphasis is on could.
Nevertheless, the market is currently showing resilience as investors are currently pumping more money into US equity funds than ever before this year, which is inspiring short-term confidence in the market. What is of course quite hawkish is the fact that the US dollar is gaining in value because the Fed is maintaining its high interest rates. This hurts exporters in particular (e.g. German companies) and burdens emerging markets with dollar debt.
On the other hand, there are also clear dovish signals. Many investors are hoping for interest rate cuts to support the economy. This is why many investors are buying Treasuries, which is depressing yields.
So you see, there is no clear indication, and even if there were, another indicator would refute the other. The dollar is acting as if the Fed will remain hawkish, Treasury yields are acting as if the Fed will soon ease (dovish).
What should we do?
- Bet on bonds. In times of crisis, capital often goes into safe investments such as US government bonds. If the tariff escalation (Chart 6) or a slump in consumption (Chart 5) weaken the US economy, the Fed could cut interest rates to support the economy. When interest rates fall, existing bond prices rise and investors essentially benefit from price gains.
- Bet on countries like China & $LUSDAX (+0.01%) (+20% since US election) . Especially with regard to China: the budget deficit has been increased to 4% of GDP (from the previous limit of 3%) and long-term government bonds worth RMB 1.3 trillion (approx. USD 179.7 billion) have been announced to promote infrastructure projects and technological innovation.
- $965515 (-0.74%) as a hedge for 2025, as escalations (trade wars, sanctions, geopolitical tensions) will increase demand. A strong dollar (hawkish) weighs on other currencies. Gold serves as protection as it is traded in dollars and rises when the dollar weakens. A weak dollar (due to Fed interest rate cuts) also drives gold as it becomes cheaper for foreign buyers.
