‘The market is still shell-shocked’: Desjardins’ chief economist shares how investors should navigate the turbulence

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Tariff wars have shaken investor confidence, sparked recession fears and sent stock markets spiraling sharply lower. U.S. president Donald Trump’s mercurial approach to trade policy has led to highly volatile trading sessions in both equity and bond markets.

To help investors navigate this very unpredictable environment, the Globe and Mail reached out to Jimmy Jean, chief economist and strategist at Desjardins Group. On April 11, he shared his outlook on tariffs, the economy and the markets.

How do you see tariff negotiations with the U.S. playing out?

Our latest forecast has a 25-per-cent effective tariff rate against Canada, and we’re talking about bringing that down. So for Canada, we’re talking about maybe 5 per cent by the third quarter, that’s where we’re leaning towards in our next forecast but it’s very fluid.

Are there certain countries that will benefit from the U.S. trade war with China as supply chains move from China to other countries?

I think we will probably see that.

As we speak, you have some Chinese producers that are apparently trying to shift production into other countries, like Vietnam, South Asia. I think we will see some of that, but it’s going to take time. China is such a mammoth in the manufacturing landscape. It is so important. Building capacity, those factories, doesn’t happen overnight and the thing that will further slowdown that transferring of capacity is that those countries won’t have much certainty as to whether things can change. If Donald Trump sees that essentially all those other countries are used to reroute Chinese exports, he can slap a 100-per-cent tariff with the stroke of a pen. So, do you really invest knowing that that threat is around? Perhaps not.

So, if you have a big reduction in capacity from China, once demand has somewhat recovered, we could end up facing shortages the same way we saw during the pandemic. I’m worried about the supply chain repercussions and the lasting impact that this could have on global inflation.

Speaking about inflation, what are your inflation forecasts and do you believe tariffs will represent a one-time increase to prices or be more persistent?

I think it’s a one-time thing and after those peak levels are reached in late 2025, early 2026, we have inflation coming back down, but there are some risks around that.

As things stand, we do have inflation rising in both Canada and the U.S. In the U.S., we have inflation rising all the way up to 4 per cent by late 2025. In Canada, we have inflation reaching somewhere between 2.5 and 3 per cent by early 2026. What helps Canada a little bit is the carbon tax removal, so that has a downward effect on inflation as well as the fact that retaliatory tariffs were not as broad. We have a downturn [in the Canadian economy] with inflation trending higher, which is quite unusual.

What do you see as the probability of a recession occurring in Canada?

We’re at 60 per cent.

What about for the U.S.?

We’re at 50 per cent. It’s rising every day. We just don’t know if or when President Trump is going to back down to a significant extent so that’s why we’re still hesitant. But if things stay the same, we have high confidence that we’re heading towards recession - there’s no doubt about that.

What are your quarterly GDP growth expectations for Canada? Perhaps we will see a robust first quarter if there’s some pull forward in demand with purchases by consumers and businesses to avoid the tariffs?

As of March 20th, the forecast we have for the first quarter is 1.8 per cent. But, in the second quarter, that’s when we start to see negatives, and we have negatives for the remainder of the year.

And then a recovery in 2026?

Yes.

Given the backdrop of rising inflation expectations and falling economic growth, what do you think the Bank of Canada is going to announce on April 16. The Street is expecting a pause. What are your expectations?

We’re in line with the Street, expecting a pause because inflation expectations are shooting higher.

I would also say something that there’s an election campaign going on and it’s delicate with Mark Carney being the former boss of the Bank of Canada Governor Tiff Macklin. It’s a minor consideration. In any case, we think they are pausing.

At year-end, where do you see the overnight rate and what leads you to that forecast?

We have the overnight rate ending the year at 1.75 per cent, so we have the Bank of Canada continuing to cut but doing so at a measured pace.

We have the Canadian economy, the U.S., and global economy struggling, which makes a compelling case to provide more accommodation. Normally, we’d see central banks cut rates in a heartbeat. They’re not doing so because of inflation concerns.

When the Monetary Policy Report is released by the Bank of Canada, what will you be looking for?

I’m wondering if they’re going to be releasing a forecast. During the pandemic, they skipped one. I wouldn’t be too surprised if they skipped that part altogether just given how things are in flux.

From what we’ve seen in Canada, what they’ve published in the Business Outlook Survey, quite clearly households and businesses are bracing for significant inflation. I’m going to be looking for their perception of the latest readings on inflation expectations and the degree to which this is problematic for them. In other words, how they weigh inflation against the clear downside risks to growth.

And also how much of what’s happening in financial markets is taken into consideration. That’s going to be important because turmoil in financial markets is something that can really change the paradigm.

What are your expectations for the labour market?

We have the unemployment rate going up. What’s going to limit the impact on the unemployment rate somewhat is the fact that we’re expecting much weaker population growth as a function of the policies put in place in 2024 by the government. We are currently seeing a lower pace of population expansion so that limits the increase in the unemployment rate, but we still have an unemployment rate ending the year at 8 per cent.

Given the uncertain economic outlook, we’ve seen extreme market volatility and a sharp downturn in equity markets. Do you believe the market has fully priced in a recession? If not, what further potential downside risk remains?

I feel that there’s still a lot of hope that Trump will come to his senses or that the bond market will effectively put a floor on how much lower the stock market can go. But I think there are going to be further legs lower because we’ve seen the sentiment data being impacted quite harshly but we haven’t seen the impact on the hard data. The hard data has been fine, but I think it’s still too early. We haven’t had a lot of numbers pertaining to April, or since we had Trump’s ‘Liberation Day’. So, I think that’s still forthcoming and there’s likely to be surprises in those numbers and that will push the market lower.

And how much lower can we go? Where could the TSX and the S&P 500 be headed for?

We are in the process of revisiting our year-end targets.

What’s clear is that with the S&P 500, every time we’ve had a contraction of more than 15 per cent during the year, the vast majority of times, the year-end has been negative, so it’s been a negative year.

With all this turbulence in the markets, what should investors be doing? Buying on weakness, sitting on the sidelines in cash or perhaps gold, or selling on strength?

Certainly, right now, I’m not advocating buying the dip yet.

The market is still shell-shocked. Again, when those economic numbers come out and very compellingly suggest that this is an economy that is tanking, that’s going to pull everything lower.

As well, the geopolitical picture is quite nasty. There is talk about potentially bombing Iran, rumours about China and Taiwan.

I’ve liked gold since the beginning of the year and it’s doing extremely well. So, I think you want to favour very defensive sectors. I think you want to favour defence. But, I’m not sure you want to be wholly exposed to the market as it stands right now.

So, do you prefer fixed income over equities right now?

I think the time will come where opportunities become more compelling but right now, I like neither. It’s more cash in the very near-term.

I’m not sure that the Chinese are selling Treasuries, but just the threat of it, and the chatter you hear about it, is pushing yields higher. And the U.S. is definitely in a bad fiscal position.

In the bond market, it’s short-term products that may be more attractive, those that respond more to monetary policy. I think the Bank Canada has cuts lined up so those are likely to do better than the long end.

And then in terms of stocks, I think things are likely to get worse before they get better. But gold looks good because you have a lot of concerns right now about the U.S. dollar as a reserve currency, so that that is fueling gold.

Do you believe there’s a shift away from U.S. assets? We’ve seen the U.S. dollar weakening and U.S. Treasury yields have climbed higher as prices fall.

I think that’s what seems to be happening.

We’re seeing the U.S. dollar under significant downward pressure, and at the same time you’re seeing yields going up.

You typically see that in emerging countries, countries facing debt crises. You don’t see that for the U.S.

So, there’s certainly signs of a loss of confidence, certainly as the trade picture is also concerned and Trump is in a ‘me against the world’ posture here. Now, will it be something that is sustained and what are the alternatives? You still have lots of questions on that.

Given the importance of a diversified portfolio are there global stock markets that you would recommend having an exposure to?

Europe has been looking good for some time as a sort of a beacon of stability, if you will, in this environment.

I think what was announced by way of defense expenditures, and that’s why I like the defense sector, was profound and game-changing for Europe - a very profound shift that’s going to affect investment in that sector for years to come.

It’s a place where the rule of law is going to be upheld.

And I think it’s still very committed to the climate transition so there’s lots of investment going on. I think Europe is looking good here.

There is the view that markets take the elevator down, but they take the escalator up, meaning that equity markets fall quickly but take a much longer time to recover. How long will it take for the TSX and the S&P to return to new record highs?

It’s all depending on what where Trump takes things, if he really backs down from all the tariff threats. If he backs down very quickly with something that’s satisfying, we could see easily those highs being formed by the next three months, so by the summer. But that doesn’t seem to be the likeliest scenario.

In the case where you still have disruptions and second and third order effects, I think it’s likely a story more for next year, if not even later.

What may be a catalyst that lifts the markets?

I think what markets need is utmost certainty that this whole tariff disruption is over, that we’re beyond this targeting of allies. And it’s hard to see how that happens.

That’s not to say that markets are not going to be able to operate in a world of trade wars and tariffs, but it’s going to take some time to figure everything out by way of supply chains, by way of seeing what companies are going to survive this because some won’t be able to survive, which ones are going to shift their production to the U.S. as opposed to elsewhere.

To me, the most important thing right now is confidence, a guarantee that we’re through this - and we’re not seeing that.

And what will give you that confidence? For instance, do we need to see deals with the EU and China?

I think, at the very least, if allies are broadly spared, allies like Canada, Mexico, the EU, that there’s some kind of a resolution.

And very importantly, one of the issues we’re struggling with as well is that even if CUSMA (Canada-United States-Mexico Agreement) ends up being renegotiated, you have somebody that can override this with a stroke of a pen.

China is a separate issue and the market has been operating in a framework where you have growing tensions between the U.S. and China. So, those were known but now, obviously, it’s reached several orders of magnitude more significant. But if, at least, it’s no longer that ‘me against the world’ position, we can see a little bit of stability. I’m not sure if it’s scope for stock markets to recover just yet because the market needs clarity.

Regardless of what happens, it’s very difficult to see that clarity coming anytime soon.

This earnings season, commentaries by management teams will certainly be a key focus for investors. What will you be paying close attention to on the conference calls and in reports?

How they’re talking about jobs, how they’re talking about their production facilities, whether there’s an appetite to shift to the U.S., and their investment plans. Those things will be top of mind.

This Q&A has been edited for clarity and brevity.