Insights Gleaned from the Initial Six Months of the Stock Market in the Current Year
**Headline:** Tariffs and Trade Uncertainty Drive Mixed Inflationary Effects in Canada, Affecting Stock Market Performance
In the first half of 2025, the Canadian stock market has shown resilience, with key indices like the S&P/TSX and the Nikkei 225 posting gains. However, a closer look at the performance of investments in the United States reveals a different picture when converted into Canadian dollars. This discrepancy is due in part to the impact of tariffs on imported goods, which has led to complex interplay of short-term price increases, downward pressures from economic slowdown, and uncertainties in business adjustments.
**Direct Price Pressures from Tariffs**
Tariffs on key sectors such as steel, aluminum, and lumber have increased the cost of importing goods, with these higher costs often being passed on to consumers, exerting upward pressure on inflation. Counter-tariffs implemented by Canada have similarly affected consumer prices.
**Incomplete Pass-Through and Consumer Demand**
While the majority of tariff costs are eventually reflected in consumer prices, the rate of pass-through depends on factors such as demand, inflation expectations, and market dynamics. During the previous tariff conflict in 2018, about 75% of tariff costs were passed on to consumers over roughly 18 months. If economic growth slows and unemployment rises, businesses may find it harder to raise prices, potentially dampening the inflationary impact of tariffs.
**Mixed Inflationary Effects**
Tariffs can also slow economic growth and lead to job losses, which puts downward pressure on inflation by reducing demand. However, temporary factors such as the removal of the consumer carbon tax have recently pushed inflation rates below the Bank of Canada’s 2% target, masking some of the inflationary effects of tariffs in the short run.
**Broader Economic Context**
Trade tensions and tariffs remain the most prominent threats to Canada’s economy, affecting growth, employment, and monetary policy. The widening trade deficit and tariffs on key exports are expected to drag on GDP growth, with CIBC warning that sustained tariffs could reduce Canadian GDP by up to 5% if made permanent. Business and consumer sentiment, as well as hiring and spending, are negatively impacted by ongoing trade uncertainty.
**Policy and Consumer Price Index**
Statistics Canada continues to monitor the impact of tariffs on consumer price inflation, but no special adjustments to the CPI will be made specifically for tariffs. The Bank of Canada is assessing the evolving effect of tariffs and aims to keep inflation near the 2% target.
**Summary**
Tariffs on imported goods in 2025 pose both upward and downward pressures on Canadian inflation. While they increase import costs and can raise consumer prices, they also slow economic growth and may reduce demand, which can dampen inflation. The overall impact remains uncertain and depends on factors such as pass-through rates, economic conditions, and business responses to trade disruptions.
**Conclusion**
As the prospects for the second half of the year darken, with increased risks of recession and a significant slowdown in consumption in Canada, investors would do well to navigate the uncertainty by maintaining rigorous diversification, both geographically and sectorally. The bond market reflects the prevailing uncertainty, with the yield curve showing signs of instability, particularly in the United States. The S&P 500, for instance, has generated a respectable return in local currency but has performed poorly for Canadian investors due to the strengthening of the Canadian dollar against the US dollar. International stock markets, particularly in Europe and Asia, have performed better than the United States.
The government is closely monitoring the mixed inflationary effects of tariffs on imported goods, as they pose both upward and downward pressures on the Canadian economy. This uncertainty in inflation rates could impact investing decisions, especially in the stock-market, with international markets potentially offering more stable returns. The finance ministry may need to consider adjustments to foster economic growth and maintain the health of the Canadian stock-market.
