Climbing The Wall of Worry

The North American equity markets ended the last month of the year on a positive note despite several worries on investors’ minds. The concerns ranging from increasing geopolitical tensions, future profitability of companies investing heavily in artificial intelligence infrastructure, to the policy rate trajectory amid still high inflation and a softening labour market weighed on investor sentiments for the most part in December. The ongoing uncertainty helped demand for safe-haven assets such as gold and silver which led the resources sector heavy on a S&P TSX index gain ~+2.2% in December. On the other hand, S&P 500 index initially dropped as investors rotated out from the growth-oriented index heavyweights towards value-oriented names; but later recovered owing to the typical seasonal year-end the ‘Santa Claus’ rally. Overall, the S&P 500 Index managed to eke out ~+0.6% total return for the month.

The markets have started the year 2026 on a positive note so far despite several concerns largely remaining in place. The United States’ military operation in Venezuela to topple the Nicolas Maduro regime followed by United States’ coast guards seizing a Russian-flagged oil tanker after a chase across the Atlantic did not spook the investors as retaliatory response from either Venezuela or Russia was limited. That said, the comments from the Trump administration during the press conference after the capture of Nicolas Maduro on Cuba, Colombia and Greenland suggests that more such episodes with a potential to increase geo-political tensions during the year cannot be ruled out.

Perhaps the most concerning development has been the subpoenas served to the United States’ Central Bank from the Department of Justice threatening a criminal indictment. The United States Federal Reserve chairman, Jerome Powell, issued a statement stating that the threat of criminal indictment has been driven by refusing to bow to President’s wishes to reduce interest rates. The Fed chair further added that this is about the Central Bank’s ability to continue to set policy rates based on economic conditions or directed by political pressure. Any concern around independence of the world’s most important Central Bank can spook the fixed income markets and send the yields higher. In this scenario, the Trump administration would have shot itself in the foot as instead of achieving reduced borrowing costs for the government by reducing interest rates they would have increased borrowing costs and the cascading effect of the same in real economy and financial markets. We think the Trump administration is not oblivious to this possibility and hence is likely to proceed with caution on this front. The President denied any involvement in directing Department of Justice towards this end. Further, the move also met with a criticism from many lawmakers with some even saying that they will block the Trump’s Fed nominees, thereby avoiding a knee-jerk reaction from markets, in our opinion.

In addition to the above, we note the announcements such as a pledge to buy $200 billion in mortgage bonds to reduce the mortgage rates and a capping the interest rate charged by credit card companies to 10%. Given that have republicans have lost several elections recently, we think the above moves are aimed to appease the United States public with an eye on mid-term elections. If implemented, some of these decisions could change the attractiveness of some areas over the other at a short notice. Further, given the opposition, the uncertainty around actual implementation of such decisions remains high, in our view. We think markets have responded to the uncertainty by allocating towards pockets within the safe-haven assets with less ambiguity such as gold and silver in addition to rotating portion of investments towards relatively safer sectors such as consumer staples.

Notwithstanding the uncertainty, the balance of incoming economic data continues to remain supportive of risk assets. As per the latest Federal Open Market Committee (FOMC) meeting, members are leaning towards one more rate cut during the year 2026, while as per the Fed Funds Futures, the markets are expecting two rate cuts before the year-end. No rate cuts are expected by either Bank of Canada or financial markets on this side of the border. The evidence of softening in the labour markets has kept the pressure off the central banks to increase interest rates even as inflation remains somewhat elevated. Overall, we think economic environment and policy rate trajectory remains supportive for the risk assets. However, given the nature of uncertainty, we continue to advocate for selectivity while staying diversified for a broad range of outcomes in such an environment.

Source: Bloomberg

Vipul Arora is a Portfolio Manager with CI Assante Wealth Management Ltd. The opinions expressed are those of the author and not necessarily those of CI Assante Wealth Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss your circumstances prior to acting on the information above. CI Assante Wealth Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc