What’s your outlook on the global economy?
It's an exceptionally difficult period to establish point forecasts. We all knew that tariffs were coming, no surprise at all. But working with the range of outcomes, 25% seemed like an extreme negotiating position. Then in the end, as we all know, that turned out to be the number. Now we're faced with a situation where we don't know how high, for how long, and the actual final incidents of where these tariffs will hit.

There’s a very wide range of outcomes, and unfortunately, we need to consider that some of these outcomes could actually drive at least Canada into recession and radically reduce the expected growth rate in the United States. On the other hand, if they're not in place for that long and they actually motivate productivity enhancing change in the economy, it might be that in the intermediate term, we accelerate growth somewhat.

We've changed our forecasts, though, although as I say, this is a very fluid period and I think our forecasting will be as fluid as the outlook. We reduced U.S. growth expectations for 2025 by fully half of 1%, and now only look for 1.9% growth out of the U.S. economy. So not a bad year, but less than what’s expected as we go through this period of kind of unnerving change and threat. In Canada, where the full force of these tariffs is already starting to bite, we've reduced our forecast by over three quarters of 1%, 80 basis points.

And now looking for less than 1% growth in the economy, only 9/10 of 1% growth for 2025 and hopefully better growth in 2026. But you know the rule of thumb tariffs higher longer is bad, lower shorter is good.

What is your view on inflation?
Unfortunately, inflation never actually did get down to 2% before it got sticky again. So you know we enter 2025 or middle of 2025 into 2026 without fully accomplishing what the fed and other central banks have been out to do. And that's now obviously complicated even further by the onset of tariffs and guessing how long will be in place and what the incidence of them will be.

It's really two potential costs to these tariffs with regard to inflation, the first one is the direct cost of producers or importers past the full amount of the tariff or some portion of the tariff onto consumers that will go right into the CPI. And then there's also the important issue of the cost of onshoring.

There was a reason, after all, why firms chose to offshore or able to reduce the cost of production to the extent that you now onshore some of those costs of production are likely to go up and those too could be placed on consumers shoulders, either in the intermediate or longer term, not so much in the shorter term, but in the longer term, as you can actually put new facilities in place.
Looking at both of those things, it's hard to see how this is good for inflation over the coming year. So as a result, we've updated our forecast and we've had to pretty significantly boost the expectation for inflation in the United States now looking for 3.3% unfortunately for 2025. So no progress there. And hopefully better progress in 2026 as we move beyond this period of instability.

Canada also, despite the weakness in the economy that we really have to expect, unfortunately, 2.9% inflation is now our forecast for 2025, very close to that of the United States.

What actions are central banks taking in this environment?
The environment for central banks has changed remarkably in the last several days. That we think is still on a pause. The economy is actually on a sound footing, although the numbers have been coming off a lot weaker in the last few days. We're going to see, you know, what the tendency of those over the next several weeks. Inflation is sticky and so they're caught between those two extremes.

We actually expect that pause to be sustained out over the next few months, perhaps as long as the rest of the year. So current level of interest rates is essentially assumed in our forecast for 2025. Not so for Canada. They're going to feel the full force of these tariffs, as long as they remain in place. Bank of Canada's likely to cut rates at least another 25 basis points or quarter 1% over the year.

But one has to think that, you know, the threats, the economy skew to the downside and that the bank will more likely use the rate lever and accept further weakness in the currency than accept further, further weakness in the economy. For Europe, just cut interest rates by 25 basis points. We still think there's more room in Europe to cut rates than there is in the rest of the world.

And, in fact, if anything around the world, risks to the forecasts skewed to the downside, should things get messier, should the economy get weaker, rates will come lower than we expect.

What is your outlook for fixed income?
Bond markets have been very, very volatile as we move through this tough period of, economic forecasting. And so no surprise. Our valuation models, which have served us a good stead for decades now, suggest that the appropriate range for the T bond is somewhere between 3.5% and 4.5%. At 4.5%, it's reflecting an expectation of perhaps not too out of hit to growth, but a hit to inflation.

At 3.5%., no concern over inflation, but lots of concern over growth. It's all dependent, I suppose, on how high tariffs are, how long those tariffs stay in place, the incidence of those tariffs and how much gets pushed through to consumers. We think in this environment that bonds are essentially fairly priced. As we get towards that 4.5%, we tend to add to positions.

As we get below 4%, and certainly as we get towards 3.5%, we let some of those positions go. So we've been quite actively trading within that parameter.

What is your outlook for equities?
We’ve been concerned about valuations in the U.S. market in particular for some time, and haven't run a lot of risk in equities for several quarters. Those valuation risks are dissipating a little bit, but they still remain quite acute, particularly at the top end of the U.S. market. You consider this in 2024, the S&P was up 23%, which by itself is historically a very, very good year. The top ten stocks or really the Mag seven, which we talked about was up 56%.

So the earnings hurdles to satisfy the kind of multiples that are evidenced in at least the Mag seven, they're really demanding. And now you have the pressure of the economy and the pressure on investor confidence that comes with the news out of Washington. So valuations and those earnings hurdles are really dominating our thinking in equities.

Analysts are looking for some of the 10% earnings growth this year. Still out of the S&P 500. And it's particularly possible that those margins could open up and accelerate later into 2026 and 2027 as it starts to harvest some of these productivity gains, which are, you know, in some sense possible from the changes that the economy will be put through. On the other hand, in the United States, at least, you really need to earn that 10% earnings growth.

And you need to sustain investor confidence through this tough period. So there's a lot of things that need to go right in order to at least keep stocks where they are, if not to produce a normal return out of stocks, out of the next 12 months. On the other hand, when we look outside of the United States, we see a very different picture as we have for some time.

So it's really been a story of two markets going on, not just the US versus the rest of the world. It certainly has been some exceptionalism that we've noticed in favor of the United States. But even the United States is like those 7 or 10 stocks versus everything else. When we look outside of those top 7 or 10 stocks, and especially when we looked at Canada, the United Kingdom, Europe, we see much better valuations.

And we also see that some economic reorganization could propel earnings higher than were originally expected. It's not a great time to run overweight in stocks. On the other hand, we don't have enough evidence that the economic challenges that we're facing over these past few weeks are going to take the economy into recession and ensure that we don't achieve the earnings targets that are currently in place.

We run fairly neutral positions in stocks, as I said, and more and more recently, we've been favoring Europe, Canadian stocks over those of the United States. Reflecting those two very different groups of valuations, we've been adjusting our regional equity exposures quite significantly. We've taken down our U.S. equity exposure below neutral. We've used the money that we've raised out of that to boost exposures in, in emerging markets and in Europe. United kingdom where we see valuations being much, much more attractive and where the earnings that are required to satisfy investor demands keep those valuations at current levels or even boost them from here, really won't be that hard to meet.

In Canada, unfortunately, with the problems in North America, we've also moved that to an underweight versus neutral setting.
With respect to portfolio asset mix, really two things here. First, for a long time, bonds weren't much use in investor portfolios as ballast against corrections in the equity markets or ventures, one might want to take in other risk assets, but at current levels, they actually do cushion against further decline in the economy that would feed through earnings and then through equity prices.

So we've been holding higher bond exposures closer to their long term neutral than we had been in prior years. And we've been very tactically managing those within the parameters of 3.5% as an expensive bond market, 4.5% starts to look pretty reasonable to us. In equities, a neutral way. While there's lots going on, lots of threats to earnings is especially big threats to very highly priced mag seven type top ten type stocks.

Other markets just aren't that expensive and so we're holding a neutral exposure there. Overall just doesn't feel like a great time to run a lot of risk in investor portfolios. Something like a neutral setting seems fine to us.