February 2026
As the U.S. economy adjusts to global tariffs, disruption and uncertainty impact the entire globe. The U.S. attack on Iran on February 28th put 3.3 million barrels per day of Iranian oil at risk, amounting to 3.5% of global supply. A disruption to the Strait of Hormuz, which borders Iran and accounts for 20% of global oil and LNG transits, further heightens the global impact. Iran’s retaliation has rained missiles on Israel, its Arab neighbours and American bases in the region. Iran’s leadership may see dragging its Gulf neighbours further into the crisis as one of its few means of forcing America back to the negotiating table. Market mayhem could just be the start of it if the war drags on and spreads farther into the Middle East. A protracted and messy conflict will push energy prices upward around the world, raising inflation and grinding growth to a halt, prolonging stagflation. In February we maintained our twelve-month forward outlook of three months of Stagnation (U.S. Real GDP growth less than 2.5%) followed by nine months of Recession (negative GDP growth) over the next twelve- month period.
China’s annual inflation eased to 0.2% in January 2026 from 0.8% a month earlier.1 The Euro Area economy expanded by 1.3% year-on-year in the final quarter of 2025. Ireland posted the strongest growth at 6.7%, followed by Spain (2.6%), Lithuania (2.5%), Portugal (1.9%) and the Netherlands (1.8%).2 Annual inflation in the Euro Area was confirmed at 1.7% in January,3 while the unemployment rate in the Euro Area decreased to 6.2% in December.4
The U.S. economy expanded an annualized 1.4% in Q4 2025. Exports fell 0.9% after surging 9.6% in Q3, and imports declined (-1.3% vs -4.4%). For 2025, the U.S. economy expanded 2.2%.5 The annual inflation rate in the U.S. slowed to 2.4% in January,6 while the U.S. unemployment rate ticked down to 4.3%.7 The U.S. trade deficit widened to $70.3 billion in December 2025. Exports were down 1.7%, led by a fall in nonmonetary gold. Imports were up 3.6%. For 2025, the U.S. recorded a $901.5 billion trade deficit. Deficits narrowed with the E.U. and China, but widened with Mexico, Vietnam, and Taiwan.8 Canadian GDP declined by 0.2% in the fourth quarter of 2025. The contraction was driven by a withdrawal of business inventories. Increased capital investment was driven by government investment in weapons systems. On an annual basis, the Canadian GDP grew by 1.7% in 2025.9 The headline inflation rate in Canada eased to 2.3% in January. Deflation picked up for transportation due to the 16.7% plunge in gasoline prices,10 while the unemployment rate in Canada fell to 6.5%.11 Canada’s trade deficit narrowed to C$1.31 billion in December. Exports rose 2.6% month over month. These gains were partly offset by a 1.0% decline in energy product exports. Canada’s surplus with the U.S. narrowed to C$5.7 billion, while the deficit with countries narrowed to C$7.0 billion.12
It was a rollercoaster start to the year for U.S. equities. The S&P 500 closed the month up 1.5%, despite a pullback during the final two trading days of the month. The S&P Mid Cap 400 and S&P Small Cap 600 advanced 4.1% and 5.6%, respectively. Major Canadian equity indices finished the month with mixed results. The S&P/TSX Composite increased 0.8%. Canadian sectors posted mixed performance for the month, with Energy leading, up 10.6%, while Information Technology fell 17.6%. The S&P Europe 350 rose 3.3% to start the year. Asia Pacific equities began the year on a strong footing, with the S&P Pan Asia BMI up 7.2% in January.
In February we reduced exposure to U.S. Equities in the Moderate Growth, Growth, and Aggressive Growth models and added that exposure to Canadian Equities. We continue to believe that Canada is managing the U.S. tariff uncertainty relatively well, replacing some U.S. exports with contracts in Europe and abroad. Gold is held across all models as a long-term strategic asset, playing a role as an effective hedge against the heightened geopolitical uncertainty and market volatility. Gold has historically been negatively correlated with the dollar.
For the U.S. economy, stagflation risk is higher because of limited policy flexibility from the Federal Reserve. During an energy shock, the Fed may lower short-term interest rates to mitigate inflationary pressures. But significant rate cuts this year, as inflation has remained above the Fed’s preferred 2% target, remain unlikely. We continue to monitor the global selloff of U.S. treasuries and the growing holdings of gold. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.
Deborah Frame, President and CIO
Drew Millard, Portfolio Manager
1 Trading Economics. China Inflation. February 11, 2026.
2 Trading Economics. EU GDP. February 13, 2026.
3 Trading Economics. EU Inflation. February 25, 2026.
4 Trading Economics. EU Unemployment. January 30, 2026.
5 Trading Economics. U.S. GDP. February 20, 2026.
6 Trading Economics. U.S. Inflation. February 13, 2026.
7 Trading Economics. U.S. Unemployment. February 11, 2026.
8 Trading Economics. U.S. Trade. February 17, 2026.
9 Trading Economics. Canada GDP. February 27, 2026.
10 Trading Economics. Canada Inflation. February 17, 2026.
11 Trading Economics. Canada Unemployment. February 6, 2026.
12 Trading Economics. Canada Trade. February 19, 2026.
Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2026. Index performance is based on total returns and expressed in the local currency of the index.
