Hello everyone,
Well, what can I say, January started fairly decent up until the 19th that is, then President Trump reignited a trade war with Europe over Greenland. He said he no longer thought of "purely of peace". Eventually, cooler heads prevailed and markets bounced back after he signaled that he had reached a "framework" for a deal about Greenland. As it ended up, the S&P500 stood to post a gain of 1.39% for January and the TSX didn't gain nor lose.
While our nation's index finished essentially flat, the real standout for Canada last month was Prime Minister Mark Carney’s speech in Davos on January 20th, titled “Principled and Pragmatic: Canada's Path”. His remarks resonated widely, recognized as inspiring and impactful, regardless of one’s background or views. Scholars will be dissecting his speech for decades to come. Essentially, the crux of the speech was that he highlighted that the old rules-based world order is breaking down as great powers act without limits, using economic and geopolitical tools for coercion. But Middle Powers like Canada are not powerless, they can help build a new global order based on values like human rights, sovereignty, and sustainability.
He dug even further into the souls of onlooking leaders when he referenced Václav Havel’s idea of “living within a lie” to explain how the previous system persisted despite its flaws but warned that this illusion is now cracking. He continued and went on to say, countries are pursuing strategic autonomy to protect themselves amid rising global tensions, risking a fragmented and unstable world. Canada’s approach will embrace a “value-based realism,” combining principles with pragmatism. It is strengthening its economy, defense, and building flexible international coalitions based on shared interests and values.
Prime Minister Carney emphasized that middle powers should stop passively accepting great power dominance and instead unite to create new rules and resilience. He wrapped up to say Canada’s unique strengths, resources, talent, financial capacity, and a free, pluralistic society, enables it to be lead in shaping a more honest, stable, and cooperative international system in this new era. I don't think I've ever been prouder to be Canadian, other than when Jeff Douglas who was best known as "Joe" from Molson's widely popular "I Am Canadian!" television commercial that aired back in 2000.
I am sorry, as I went off on a tangent there… but getting back to markets, it was a real yo-yo last month, up down, up and down again. The TSX was driven by a combination of elevated commodity prices, Notably, record highs in gold and silver prices, fueled by robust demand from central banks, ETFs, and momentum investors.
There was another bright spot other than the Prime Minister speech, the Canadian dollar also strengthened, up 2.87% (https://ycharts.com/indicators/canadian_dollar_to_us_dollar_exchange_rate_ecbeer) benefiting from both export success in gold and oil and a softer U.S. dollar. Despite some fragility in consumer sentiment and retail growth, the equity market remains resilient, bolstered by favorable trade data and diversified export agreements.
Last month, I gave you an outlook which was "cautiously optimistic" where we could have continued equity market gains supported by solid economic expansion and stable if not improved corporate earnings. Well, so far so good, I guess. However, I have been watching the data and those who report on it. Of particular interest was a study out of the Kiel Institute For World Economy, the Wall Street Journal also reported on it, and the caption was "who really is paying US tariffs?" The study found that from the US import transaction data, 80% of the importing firms took a slice out of margins to keep prices the same in retail, while 20% of the firms passed on the price hike to consumers.
Longer term, I don't think this is a sustainable business plan if importing firms continue to erode their profit margins, as several probable outcomes could emerge. Over time, persistent margin compression may lead to reduced investment in innovation, lower employee wages, and diminished capacity to absorb future shocks. Additionally, some firms may eventually be forced to exit the market or consolidate, resulting in decreased competition and potentially higher prices for consumers in the long run. I mean, this is just my opinion but if I'm running a business, I'm going increase prices to stay afloat.
Eventually, I'm sure importing firms will do the same and raise prices, and if they start to push prices higher, inflation is inevitable. Here in lies the problem, if inflation starts to rise while central banks begin lowering interest rates, just because President Trump said so, the likely outcome is a complex environment for both markets and consumers. On one hand, lower interest rates typically stimulate borrowing and investment, which can support economic growth and potentially boost equity markets in the short term. But on the other hand, if inflation continues to climb, the purchasing power of consumers may erode, leading to higher costs for goods and services and possibly squeezing household budgets.
Moreover, the contradiction of rising inflation and falling rates could undermine confidence in central banks’ commitment to price stability, potentially leading to further currency depreciation and volatility in financial markets. Over time, this could force central banks to reverse course and tighten policy again, which might cause abrupt market corrections and increased uncertainty for businesses and investors. To refresh your memory, in 2022 we saw a rapid rise in interest rates and the result was deterioration in both the equity and fixed income markets alike. I know this is an unlikely possibility; however, I'm just covering all the basis.
The Trump administration has been completely unorthodox, and unpredictability has become foundation of their legacy, and at this point, nothing surprises me anymore. My point in saying all of this is that although market strategists are bullish on the financial markets for 2026, this could be a potential headwind slowing progress and giving rise to bears lurking in the dark. In the end, I'll continue to be "cautiously optimistic" as I said last month. Lol.
For now, looking forward, like the immediate future, historically, February in financial markets often serves as a period of consolidation or mild pullback following the strong momentum typically observed in January, a phenomenon sometimes referred to as the “January Effect.” This effect describes a tendency for stock prices to rise in January, particularly for small-cap stocks, driven by investors buying previously oversold assets. As January enthusiasm fades, February tends to see more measured gains or sideways movement.
Additionally, February marks the start of the corporate earnings reporting season for many companies, especially in the United States, which can increase market volatility. Positive earnings surprises frequently fuel sector or broad market rallies, whereas disappointing results may lead to declines. The month is also notable for the release of several key economic indicators, including employment data, inflation figures, and manufacturing indices, all of which can influence investor sentiment and market direction.
Sectorally (not an actual word), technology and consumer discretionary stocks sometimes perform well during February, driven by earnings and seasonal demand factors. On a broader scale, geopolitical developments and central bank policy decisions early in the year can significantly affect global risk appetite, adding layers of complexity to market behavior in February, just as I describe earlier. Overall, average historical returns for U.S. equity markets in February are generally positive but more modest compared to the strong rallies of January, and volatility typically increases due to earnings season and economic data releases.
In summary, while the markets have started the year with impressive momentum, underlying uncertainties and shifting global dynamics warrant a balanced perspective. We should remain vigilant, prepared for both opportunities and potential challenges as economic and geopolitical factors continue to evolve. Staying informed and adaptable will be key to navigating the months ahead. Ultimately, a cautiously optimistic approach remains prudent as we move further into 2026. Happy Groundhog Day!
The information contained herein has been provided by Rietze Duke & Associates Wealth Management and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance.
Commissions, management fees and expenses all may be associated with investments in exchange-traded funds (ETFs). Please read the prospectus and ETF Facts before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. ETF units are bought and sold at market price on a stock exchange and brokerage commissions will reduce returns.
Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political, and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2026. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE®”, “Russell®”, and “FTSE Russell®” are trademarks of the relevant LSE Group companies and are used by any other LSE Group company under license. “TMX®” is a trademark of TSX, Inc. and used by the LSE Group under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. Index returns are shown for comparative purposes only.
Indexes are unmanaged and their returns include reinvestment of dividends, if applicable, but do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.
Links to other websites are for convenience only. No endorsement of any third-party products, services or information is expressed or implied by any information, material or content referred to or included on or linked from or to here.
TD Asset Management Inc. is a wholly-owned subsidiary of The Toronto-Dominion Bank.
Rietze Duke & Associates Wealth Management is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries.
