Market and economic commentary
February 2025

February had a rocky start as US tariffs on Canada and Mexico were to take effect, but were paused for a month amid discussions between the countries’ leaders. Markets were mixed overall, but European stocks led the way as governments started drafting plans to reduce their reliance on the US and significantly invest in their own militaries.

The Compass Portfolios and ATBIS Pools (the Funds)¹ saw mixed performance over the month as weakness in US equities weighed on the equity heavy funds in February. Find up-to-date performance data here.

Below are index total returns in Canadian dollar (CAD) terms for February:

The beginning of the month showcased why it pays to be patient in turbulent markets—news on the broad tariffs on Canadian and Mexican imports into the US trickled in throughout the day, ultimately landing on a month-long pause. The Canadian dollar saw significant movement, losing almost $0.03 versus the USD, to levels not seen since the early 2000s, before recovering all of its losses as news of the pause came to light. North American equity markets also dropped, and while some losses were recovered, some were still in the red as the uncertainty on policy weighed on investor sentiment. 

Although policy risk continues to weigh on consumer and market sentiment, there was some strength in economic data that surprised market participants to the upside. Both Canada and the US added more jobs than expected, causing unemployment to fall in both countries. US headline inflation rose slightly to 3% and while the Federal Reserve’s (the Fed) preferred gauge of inflation fell slightly, it’s difficult to see the Fed cutting rates immediately given the continued strength in the US economy. Canadian headline CPI came in as expected, although it is still being affected by the GST holiday, pushing prices paid lower. The Canadian economy grew an estimated 2.2% year over year, which also pushed per capita GDP growth meaningfully positive for the first time since early 2023. Growth and retail sales that have been trending positive for the past few months could be evidence that the Bank of Canada’s rate cuts are having the intended effect.

Markets

Equity market reaction to the tariff turbulence was initially negative amongst most global investors, but by month end much of the pain was felt in US stocks. Equities in the US market were mildly negative for most of February as uncertainty on tariffs remained top-of-mind despite earnings growth accelerating to 16% year over year on an aggregate basis. Weakness in the service and composite purchasing managers indices (PMIs)—which are forward looking indicators—drove stocks, especially small and mid cap stocks lower, before slightly recovering towards the end of the month. 

Stocks in Europe told a different story performing positively on an absolute basis, outperforming their North American peers with tariff talk being focused on China, Mexico and Canada. European nations are reacting to a less supportive US from a military standpoint, which has driven initiatives to invest heavily in their own militaries. This drove European aerospace and defence companies in particular, pushing those stocks over 12% higher in CAD terms² for the month. The international holdings benefitted from this push, particularly within European names such as Rheinmetall and BAE systems, both which support defence capabilities.

Canadian equities were more or less flat over the month in aggregate—positive for the month until falling much in the same way as the US market did in mid to late February. There were some notable pockets of weakness within IT stocks such as Shopify and Celestica, although much of this was offset by precious metals names which continued to ride gold’s rise in price this year, and a combination of certain names within financials and utilities. Constellation software was one bright spot within the IT space that outperformed on both an absolute and relative basis to the index, and is held within the Portfolio, helping to offset poor performance from the other IT names.

Although there was some economic data that was supportive of the Canadian economy which drove yields higher earlier in the month, yields across the board fell by the end of February, leading to a positive month for bonds. Since yields fell overall, government bonds and those more sensitive to interest rate movements performed best, and limited credit spread movement also led to corporate bonds underperforming overall. This led to slight underperformance of the Portfolio’s fixed income holdings as it held a higher proportion of corporate bonds and fixed income securities that are less sensitive to interest rate changes than the index.

Compass Portfolios Series F1 - Returns net of fees

ATBIS Pools Series F1 - Returns net of fees

¹ Using F series returns 

² As measured by the STOXX Europe Total Market Aerospace & Defence Index.