Lexicon Financial Group Weekly Update — April 16, 2025

Apr 17

“Living with fear stops us taking risks, and if you don’t go out on the branch, you’re never going to get the best fruit.”

— Susan Parish, an English actress

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

Looking Around

Tariffs are still making the headlines daily, even though President Trump paused the toughest tariffs until summer. We have discussed tariffs a lot recently; so, like Trump, we’re going to take a little break from that discussion.

One of our roles in managing portfolios is helping clients navigate risk. Historically, the more risk people take in their investments, the higher the potential reward. Which makes intuitive sense. If a knowledgeable investor wants a higher return, they naturally have to seek out strategies that have less certain or predictable outcomes.

A good example is investing in a bellwether blue-chip company that is doing well versus a start-up company that faces structural or regulatory challenges. One is clearly riskier than the other.

Statistically, the risk of an investment can be measured by looking at how an investment correlates or changes against a standard benchmark. Stocks that show daily price changes – up or down – than the benchmark are, by definition, riskier. That is, their prices fluctuate more. Conversely, more stable or steady stocks with lower amount of price changes are considered less risky. You may hear people talk about this on television – they use the term “beta” as a measure of risk. “High beta” investments are more volatile and riskier.

Here’s the rub though. When stock markets are rising, almost everyone wants in and the concept of “risk” is less apparent because it’s working in their favour. But the markets don’t always rise, as we all know, and sometimes, when they fall, they fall rapidly and violently. (1)

Everyone accepts risk when markets are going up and are favourable to their bottom line. It’s a different feeling (thanks to loss aversion, individuals feel the pain of loss twice as much as the equivalent pleasure of gain) altogether when markets are declining, but the statistical risk measurement may still be the same.

Which is why we’re always concerned about downside risk and preserving capital. For us, diversification is a powerful tool for achieving this. Diversification may limit returns when markets are soaring, but it acts as a safety net when one or more asset classes are facing challenges. It helped protect portfolios from catastrophic losses during COVID and has dampened the impact of markets on portfolio values during this tariff war.

Diversification isn’t new or complicated. It’s simply a combination of different assets from different categories that react differently to changing market conditions. It is the equivalent of “not putting all your eggs in a single basket,” although that’s a bit simplistic.

Traders have, for millennia, understood risk. You don’t load all of your goods on a single ship. Because if lost at sea or to pirates, you lose everything. That is way too risky!

Over 70 years ago, Nobel laureate Harry Markowitz put forward the concept of the efficient frontier, a theoretical set of portfolios that offer the highest potential return for the least amount of expected risk. This theory helped people visualise the trade-off between risk and return in their portfolios (we wrote about Markowitz in June 2023, after he passed away at age 95).

Ultimately, the relationship between risk and reward is integral to investing. It’s important to understand this relationship, but it is equally important to always ask what the short-, medium- and long-term investment goals might be. Why? Because the way we measure risk and anticipated return changes as we look out over longer time periods.

Read and Watch

Want deeper insight into topics in your Weekly Update? Then, read and/or right click:

The High Risk, High Reward Trump Market

US trade war could divert Chinese goods to European markets

China reports 5.4% GDP growth in 1st quarter, but analysts say tariffs will bite soon

Raymond James Markets & Investing: Tariff goalposts have shifted, but results remain the same - CIO Larry Adam, April 11, 2025

Raymond James Economy & Policy: Why don't we fix the fiscal deficit? That will start fixing our trade deficit - Chief Economist Eugenio J. Alemán, April 11, 2025

Looking Back

Stock markets across the globe ended last week mixed. Toronto Stock Exchange's S&P/TSX Composite Index (TSX) rose on Friday, as higher commodity prices boosted resource shares and investors weighed the probability for the recent financial market volatility to subside.

The TSX ended up 1.7 per cent last week, after some wild gyrations, including a near-eight-month low on Tuesday. The Canadian dollar strengthened to a five-month high against the U.S. dollar, as the erratic nature of U.S. trade policy weighed on the greenback, ahead of a potential pause in interest rate-cutting by the Bank of Canada (BoC) this week. All of the 10 major sectors rose but the gain for real estate was minor, as the recent rout in the U.S. bond market helped drive up Canada's long-term borrowing costs. The Canadian 10-year bond yield touched a 2-1/2-month high at 3.309 per cent. (2)

U.S. stock markets closed higher after a volatile week, thanks in part to a slew of trade-related headlines that have continued to dominate investor sentiment. The week opened with equities sharply lower, extending losses from the prior week, as negative sentiment intensified ahead of Wednesday’s implementation of the Trump administration’s latest round of tariffs.

However, on Wednesday, President Trump announced that he was authorizing a 90-day pause on the higher reciprocal tariffs for most countries except China, to allow time for negotiations. This news sent stocks soaring higher with the Nasdaq Composite gaining over 12 per cent – its second-best day on record.

The escalating trade war between the U.S. and China, the world’s two largest economies, along with concerns about the broader impact it could have on global economic growth, appeared to dampen some of last Wednesday’s positive sentiment, which led to stocks giving back some gains on Thursday. The U.S. Federal Reserve (Fed) released minutes from its March policy meeting last week, which stated that it saw increased downside risks to employment and economic growth and upside risks to inflation. Fed meeting participants also contended that inflation was likely to be boosted this year by the effects of higher tariffs. However, most favoured a cautious approach to monetary policy amid the uncertainty about the net effect of an array of government policies on the U.S. economic outlook.

The University of Michigan reported last week that its Index of Consumer Sentiment’s year-ahead inflation expectations surged to 6.7 per cent in April. This is the highest level since 1981.The index itself declined for the fourth straight month to 50.8, which is down 11 per cent from March and the lowest level since June 2022. Also, the volatility and uncertainty around global trade during last week weighed on U.S. Treasuries. Bond prices and yields move in opposite directions, so, long-term yields saw the sharpest increase, followed by intermediate- and short-term yields. The yield on the benchmark 10-year Treasury note rose to well over 4.5 per cent by Friday morning, after ending the prior week under four per cent. Increases in bond yields (interest rates that investors receive in return for lending to the government) raises the cost of borrowing for the U.S. government, consumers and businesses.

In Europe, the STOXX Europe 600 Index ended 1.92 per cent lower, as trade tensions intensified. Although markets rebounded, narrowing losses, after U.S. President Donald Trump said that he would delay the imposition of “reciprocal” tariffs for most trading partners, most major European indexes fell. Notably, the 25 per cent tariff imposed on Japan’s automotive imports into the U.S. was not included in the reciprocal tariff pause. Japan’s stock markets fell, and Japan is already seeking an exemption from higher tariffs.

Mainland Chinese stock markets recorded a loss last week. However, the declines were tempered by hopes that the spiraling trade war with the U.S. would lead the Chinese government to roll out fresh stimulus that would boost the economy. U.S. tariffs may reduce China’s gross domestic product between one and two per cent this year. Regardless of the magnitude of tariff increases, China has the capacity to offset their impact through more fiscal stimulus, as it has more room to maneuver. Moreover, China’s leaders have clearly signaled their intention to boost domestic consumption, a trend that is expected to continue. (3)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.