Equity markets in both the U.S. and Canada are being rattled by a combination of tariffs and, at least in the case of the U.S., convergent factors including DOGE cuts and softening economic data. As of March 10, the S&P 500 has fallen over 8% from its February 20 peak, and Canada’s TSX has fallen more than 4% over that same time. On a year-to-date basis, however, both indices are down by only about half of those amounts.

The proximate trigger for Monday’s sharp selloff was recent remarks from both President Donald Trump and Treasury Secretary Bessent who, respectively, indicated that “there is a period of transition”^[1] and a “detox period”^[2] for the U.S. economy as tariffs are implemented and government spending is curtailed. As recently as a week ago, a common belief was that President Trump would ease off tariffs in the face of pronounced economic or stock market weakness. It now appears likely that President Trump would tolerate a greater impact to the economy and markets “because what we’re doing is very big.”^[3] Meanwhile, the tariff outlook between the U.S. and rest of world remains contentious. Another package of tariffs is set for early April, and the firm stances taken by Canada, the EU and (to a lesser extent) China, raise the possibility of continued economic and market weakness before either a negotiated deal or a new status quo is reached.

If tariffs weren’t enough disruption, DOGE spending and employment cuts appear on track to barrel through the economy at a time when U.S. economic data is softening. DOGE cuts, presuming they continue, imply that U.S. fiscal policy has turned contractionary and is a headwind to economic growth. Even the once stalwart U.S. labor market has seen certain leading indicators, such as temporary employment, turn negative. In the past year, consumer spending was bolstered by the positive “wealth effect” whereby higher stock prices lead to greater spending. This effect has now turned neutral and is at risk of going into reverse if market weakness persists.  

On the positive side, it’s likely these multiple destabilizing elements will hasten the Trump administration to make trade deals or settle on a new status quo within months rather than quarters. We also believe the Fed will resume its rate cutting campaign by May or June, which should be supportive of financial markets. Productivity growth should also be a major driver of corporate profits this year. Taken together, the second half of the year could still line up quite positively.

At present, however, the proximity, severity, and number of current disruptions are compressing the stock market’s focus. While we do not expect a recession, the current market environment calls for patience and a dose of caution.