Deeper issues than tariffs roiling markets

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Global equity markets began the week with a sharp surge in volatility, driven by a significant sell-off in last year’s market leaders — U.S. technology stocks. These high-flying names saw substantial losses ranging from three to 15 per cent in a single trading session, though markets did regain some losses.

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Much of the market attributed the downturn to U.S. President Donald Trump’s weekend comments about his willingness to accept short-term economic pain to advance his tariff policy, we as asset managers believe there are deeper and more structural factors at play.

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One key underlying issue is the current administration’s need for significantly lower interest rates. Historically, the most effective way to push the U.S. Federal Reserve toward easing monetary policy is through signs of economic weakness and a declining equity market. This strategy may be particularly critical now, given the looming wall of U.S. debt maturities.

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Nearly US$3 trillion in U.S. debt is set to mature in 2025, with about US$2 trillion consisting of short-term Treasury bills issued under former Treasury Secretary Janet Yellen. Compounding this pressure is the bond market’s need to absorb an additional US$2 trillion in the form of the U.S. budget deficit. This convergence of factors increases the urgency for lower rates to manage the mounting debt burden while stabilizing financial markets.

Investors can have several strategic approaches to market conditions, depending on their outlook for the global economy. One perspective is to view the current downturn as a buying opportunity. If you believe the economic weakness is temporary and expect Trump to stimulate growth through corporate tax cuts once rate reductions are in place, there are attractive entry points across the market.

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Last year’s market darlings, such as U.S. tech stocks, are trading at significantly lower levels. For instance, Tesla Inc. has fallen nearly 50 per cent from its peak, Nvidia Corp. is down 30 per cent and Amazon.com Inc. has declined 20 per cent. If the Federal Reserve pivots to an easing stance, these stocks could rebound strongly, making this a potentially opportune moment for bullish investors to increase exposure.

However, we remain more cautious and are actively seeking ways to position defensively while incorporating embedded downside protection. This approach has already paid off in areas such as our Russell 2000 exposure, where our put protection has established a 100 per cent floor through November 2025, safeguarding us against further declines. In volatile environments such as these, capital preservation becomes as critical as seeking returns.

Our more bearish outlook stems from a reluctance to rely on the Federal Reserve to drive profits. We anticipate further downside in areas of the market that we categorize as “levered beta” — highly sensitive sectors that are disproportionately affected by economic slowdowns and policy shifts. As a result, we are focusing on defensive sectors that historically perform better in uncertain, recessionary environments.

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Among our preferred areas of exposure are U.S. health care, where we have recently increased our positions due to the sector’s resilience and steady cash flows. We also maintain holdings in Canadian and U.S. utilities and dividend-focused equities, which offer stability and consistent income. Additionally, we have exposure to consumer staples through our U.S. value strategy, as these companies provide essential goods and are less susceptible to economic downturns.

In line with our protective stance, we have been employing principal-protected structured notes as a key component of our strategy. These instruments provide leveraged upside participation while safeguarding principal over a defined period. For example, we recently executed a note offering 1.55 times upside participation in specific indices with full downside protection for the next 2.5 to three years. This approach allows us to maintain equity exposure while mitigating the risks associated with further market volatility.

Overall, our strategy remains focused on balancing risk and reward. While some view the current volatility as a temporary dislocation and a buying opportunity, we remain wary of the broader structural challenges facing the market. By emphasizing defensive sectors and incorporating protective instruments, we aim to navigate the uncertain environment while preserving capital and positioning for future opportunities.

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Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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