Inflation is climbing back up the market agenda, raising fresh questions about interest rates and what a higher-for-longer environment could mean for small-cap stocks.

In the September edition of The Market This Month, Canadian Securities Exchange President Anna Serin and StoneCastle Investment Management portfolio manager Bruce Campbell examine the changing rate outlook, capital availability for smaller companies, Canada-U.S. trade tensions and the seasonal patterns investors are watching heading into the fourth quarter.

Campbell says higher oil prices are contributing to renewed inflation pressure, while movements in the U.S. two-year Treasury yield are providing another signal to watch ahead of Federal Reserve decisions.

For small caps, the consequences could be particularly important. Smaller companies can be more sensitive to borrowing costs and access to capital, potentially putting pressure on margins if rates remain elevated.

So far, however, Campbell says that deterioration has been limited. Recent earnings have remained strong, while significant capital is still available on the sidelines.

Resources stand apart from small-cap market

One notable divide is emerging between resource companies and the rest of the small-cap universe.

Strong commodity prices have supported resource equities and helped attract capital to mining companies. Outside resources, Campbell says some Canadian small caps have lagged their mid- and large-cap counterparts.

Activity on the Canadian Securities Exchange illustrates the continued appetite for resources.

August brought new listings spanning mining, critical minerals and technology, while several companies secured significant financings. Allied Critical Metals continued with a US$25 million financing supporting its tungsten strategy in Portugal, while McFarlane Lake Mining announced a C$15 million bought-deal private placement.

Avanti Gold increased its bought deal from C$35 million to C$45 million following strong demand, while Precore Gold closed an oversubscribed C$6 million private placement.

The CSE also entered the ETF market for the first time, listing the Caldwell Lazard Core Plus Infrastructure Fund (CSE), followed by the Caldwell U.S. Dividend Advantage Fund (CSE).

Campbell says ETFs can provide portfolio managers with efficient exposure to specialist areas, adding that the ETF market has expanded considerably over the past two decades.

Tariffs add another layer of uncertainty

Rates aren’t the only macroeconomic issue confronting companies.

Serin and Campbell also discuss renewed Canada-U.S. trade tensions and the difficulties tariffs create for businesses attempting to make longer-term investment decisions.

Campbell identifies auto parts, aviation and recreational-product manufacturers among areas that have experienced significant market reactions to tariffs.

Commodities add another dimension to the dispute. The United States remains an important customer for Canadian resources, while Canada remains heavily dependent on its largest trading partner.

Campbell argues that the long-term implications will depend partly on how the relationship evolves and whether Canada eventually succeeds in diversifying more of its trade.

Q4 approaches after a historically weaker period

The U.S. presidential cycle provides another historical lens for investors heading into the final quarter.

Campbell says the second year of the four-year cycle has historically produced the weakest returns, but much of the return generated during that year has tended to arrive during the fourth quarter.

He cautions against treating the pattern as a forecast, comparing it with climate rather than weather: it describes a historical tendency without determining what will happen in any individual year.

Late September and early October have also historically experienced softer market conditions, potentially creating a key period to watch before the traditionally stronger seasonal window that follows.

Inflation remains the central variable. Whether energy prices continue climbing or begin to moderate could help determine how much pressure remains on prices, interest rates and small-cap companies as 2026 draws to a close.

Watch the full episode above for Anna Serin and Bruce Campbell’s discussion of inflation, small caps, tariffs, ETFs and the market outlook heading into Q4.

Transcript

This transcript has been lightly edited for clarity and readability.

Anna: Welcome back to The Market This Month. I’m Anna Serin with the Canadian Securities Exchange, and September has arrived with markets giving us plenty to talk about.

Inflation is back. After spending much of the year talking about when rates might come down, we’re suddenly asking a very different question: could the U.S. actually raise rates again?

U.S. inflation is still well above the Fed’s two per cent target, commodity and energy prices are moving higher, and the August CPI number is coming just days before the Fed’s September meeting.

So are we heading back towards four per cent inflation? And if the Fed does surprise the market with a hike, what happens to equities, and particularly small-cap growth? Because higher rates can change the entire equation for companies that are valued on future growth.

Then there are the tariffs. The Canada-U.S. trade relationship has taken another turn this month. Negotiations broke down, the U.S. moved ahead with 50 per cent tariffs on a range of Canadian goods, and Canada has now responded with its own counter-tariffs.

But for Canadian investors, the bigger question is what this means for our commodities and critical minerals. Does a more protectionist United States ultimately make Canadian resources less competitive, or does it accelerate Canada’s push to diversify our markets and build stronger relationships with Europe and Asia?

Then we have the election cycle. We’re moving into a period where political uncertainty, fiscal spending and market seasonality could all collide. Historically, the months leading into U.S. midterm elections can be choppy, but what happens after the election could be even more interesting.

So where does that leave investors?

Turning to the CSE, there are some big developments happening across our marketplace as we head into the fall.

For the first time, the CSE is now trading ETFs. We welcomed our inaugural ETF listing, the Caldwell Lazard Core Plus Infrastructure Fund, trading under CPIF, on August 17. The fund invests primarily in companies operating in, or expected to benefit from, infrastructure-related businesses around the world.

That was followed by the Caldwell U.S. Dividend Advantage Fund, trading under UDA.

The addition of ETFs is another step in the continued evolution of the CSE marketplace, expanding the range of investment products available on the exchange alongside our growing community of public companies across mining, critical minerals, technology, healthcare and other sectors.

We also saw a very active August for new listings, with Scotia Metals, Lynx Resources, Radiant Uranium, Gold Coast Resources, Atenders Technology, BioMine Labs, Field of Gold, Althia Copper, Crate Critical Minerals, Synergy Metals and Pelican AI all joining the CSE.

Perhaps even more importantly, we’re seeing some significant financings getting done.

Allied Critical Metals continued with its US$25 million financing, supporting the company’s tungsten development strategy in Portugal. McFarlane Lake Mining announced a C$15 million bought-deal private placement to advance its gold projects.

Avanti Gold upsized its bought deal from C$35 million to C$45 million, and the financing was oversubscribed, providing additional capital for exploration and advancement of its Masisi project.

And just last week, Precore Gold closed an oversubscribed C$6 million private placement, with proceeds going toward exploration and working capital.

So despite the uncertainty around rates, tariffs and the broader economy, capital is still moving.

The question is: where is it going next? Is it moving towards commodities and critical minerals or back towards value? Or, if inflation finally starts to cool, do we see investors rotate back into growth and small caps?

I’m joined again today by my co-host, Bruce Campbell, with StoneCastle Investment Management. Bruce, let’s dig into it.

Well, thank you for joining me, Bruce. You flew out to Vancouver today, and the sun is out. We did that just for you. Thanks for joining us.

Bruce: Yeah, it’s an awesome day today.

Anna: Absolutely. It’s been a bit of an odd summer. I don’t know what you’re experiencing in Kelowna, but we’re happy for any sunny day we get.

Bruce: It just went too fast. I can’t believe it’s September.

Anna: Went way too fast. Hopefully, we have a nice fall.

It has been a busy summer. There has been a lot that’s happened in the markets. Typically, it’s a little sleepy in July and August, but it was not like that this year, right?

Bruce: You couldn’t look away because there was always something happening headline-wise.

Anna: I know. We were trying to find time to relax, but we weren’t able to.

The CSE was super busy this summer. I think we had dozens of companies list. I don’t know the exact number off the top of my head, but over the three or four months of summer, a lot of new companies came to market.

Most of them were in the mining sector, which we kind of expected, and we’ve been seeing that trend. But we’re also starting to see some really great technology companies come to market, which is exciting for us as well, and technology companies that seem to be of real value.

Why don’t we talk about some of the stuff that happened in the broader market? Let’s talk about inflation and rates. I feel like we started the year talking a lot about this, and we talked about this a lot last year. Let’s talk about it again.

Bruce: I think, in the history of our show, this is probably the topic we’ve talked about the most: inflation.

Anna: The most. That’s right.

Bruce: When you think about what’s happened, we had a period of time where inflation was really dropping for, let’s call it, decades. The direction was down.

Now we’re starting to see that change, and we’re going through this kind of ebb and flow. We saw this really high inflation coming out of COVID. It started to come back into control, and now it looks like we’re going through this second rotation of higher inflation.

Anna: That’s right. When inflation goes higher, the government will take action to increase rates, right, to try and keep inflation down? And, if I’m correct in saying this, we usually kind of follow suit with the U.S. a little bit on these moves, right?

Bruce: Typically, yeah. What they’re trying to do is slow the economy just enough so that inflation doesn’t get too out of control, but not so much that it slows the economy down into a recession.

Typically, interest-rate policy globally tends to rotate with each other. So when rates are going up, you tend to see rates moving up across the globe, and down the same way.

Anna: Right. There are a variety of reasons that it will go up. Is some of this man-made from some of the geopolitical movements that we’ve been seeing over the past year?

Bruce: Yeah, 100 per cent.

You started to see the inflation trend going down, and then the war started in Iran in March.

If you think about what happens with inflation, oil has an impact on really any good that we have access to. I’ve seen some calculations where, for every dollar oil goes up per barrel, it adds three basis points to the inflation rate.

You think, “Oh, that’s not that much,” but oil’s gone from 60 to getting close to 100 here. So that’s a pretty big impact when you add three basis points every dollar increment. That’s having an impact. It’s starting to trickle through.

Anna: Absolutely. So what are we seeing right now in the markets with inflation? We’re starting to see inflation go up, and we are potentially expecting an increase in rates from the Fed. Is that what we’re expecting?

Bruce: The two-year yield of interest rates down in the U.S. tends to track, or actually lead, what happens with interest rates.

Anytime you see that two-year yield start to move up in rate, that’s starting to put pressure. It’s basically telling the Federal Reserve, “Hey, we see an inflation problem. You need to probably do something.”

Lots of times they’ll wait just to make sure that it’s actually happening, but that spread now is fairly wide. We have a Fed meeting coming up in the middle of September. It’ll be really interesting to see whether or not they increase interest rates.

As we’re starting to head into the midterm elections, there’s a lot of concern about whether it’s going to become a political thing.

We know that the president loves to point fingers and call names, so whether or not rates go up and then he does that, it’ll be really interesting to watch.

Anna: His favourite game. So do you think he would be pressured then to not increase rates to be in more favour for the midterm election?

Bruce: He’s in a really tough situation because we have inflation going up, and that is certainly something he has to control and try to control.

But at the same time, if he bumps interest rates up, there’s going to be a whole lot of noise about how that’s going to be really tough on the housing market in the U.S. and in Canada.

At that point in time, there’s going to be a lot of talk of, “Oh, this was a political move,” even though the president just appointed this new Fed chair. So it’s a hard argument to make, but the Fed chair is in a really tough spot here.

Anna: Okay. Well, we’ll watch for that in mid-September. By the time this episode is released, it will be very close to that, but we will talk about that next month.

Let’s talk about the small-cap space and what we’re seeing there. Obviously, this is something that we focus on the most in Canada at the CSE and in the junior markets.

If rates stay higher for longer, what does this mean for the small-cap space?

Bruce: If you look at the whole space, it really is bifurcated in a lot of ways.

We’ve seen really strong commodity prices. You’re seeing that with listings. We’re seeing that with stock prices moving up.

But if you move away from that, typically what happens in the small-cap area is that they’re way more sensitive to interest-rate moves because of their ability to access capital. That really starts to put pressure on their profit margins.

You haven’t seen that yet. We’re still seeing really strong profit margins, and we just came through earnings reports where they were fantastic.

But that’ll be something the market starts to look for. You’ve started to see little pockets of that deterioration already, where small caps outside of resources, particularly in Canada, haven’t done as well as some of the mid- and larger caps.

You start to question: is that a function of the summer being slower and just not as many people looking, or is that a function of the market starting to look ahead at inflation?

Anna: I think we talked about this over the past few episodes, but one thing I’ve noticed when I look at the financings that happen with our issuers is there is still a very healthy amount of capital coming to us from the U.S.

Do you think this movement with increased rates and inflation could maybe dry up those taps a little, or do you think that’s not correlated?

Bruce: The anxiety that we all get managing portfolios — that’s what we get anxious about.

We say, “Oh, the capital’s going to dry up and the market’s going to deteriorate.”

That certainly hasn’t been the case yet. There seems to be a lot of capital available on the sidelines, which is great because we went through a period where it wasn’t like that.

The money supply continues to increase. So as long as inflation doesn’t go back to six or seven per cent and stays sub-four per cent, rates aren’t going to have to go up that much to accommodate that.

At that point in time, then we probably still continue to see that flow.

Anna: Okay, well, good.

Let’s talk about tariffs. It was an interesting month, I think, for North America in the land of tariffs.

We’ve obviously also been talking heavily about tariffs since — was it the beginning of this year or last year? It must’ve been last year because when Trump came in as president, I feel like every episode we were trying to catch up our viewers or create a synopsis on tariffs that were coming and going and being lifted and added back and forth.

It seems like things are coming a bit to a head between our two countries on this tariff war. What are your thoughts on this?

Bruce: Going back, if you remember, it all started in April — well, actually in March of 2025 — about fentanyl. That was the original reason that we were getting tariffs.

Somehow, it’s really morphed over this period of time, and now the two countries are really at an argument place.

It’s really hard to figure out who’s telling the truth. Both sides tell a different story, but at the end of the day, we have these companies that are being tariffed.

It’s really hard to operate if you’re a company because: do we have those tariffs? Are we not having those tariffs? What impact are they having?

It’s an incredibly challenging environment for companies to operate in, but also for investors trying to figure out which tariffs are sticking and which ones aren’t.

Anna: When this all started, I remember doing a bit of research on tariffs, why they get implemented and how they get implemented.

The fundamental purpose behind them, when countries did this a long time ago, was partly to create some income for the country to help its balance sheet.

When you look at it from this perspective, has it gone completely outside of the original purpose when we’re just tariffing each other?

Bruce: The other thing it allowed is protectionism as well, to protect an industry.

That’s a big part of it. There are certain industries that our governments, both Canada and the U.S., want to protect because it’s a big enough industry and strong enough that we want to control that and have it growing.

But at the same time, there has been a little perspective loss because now we start seeing tariffs on things that are outside of necessarily that protectionism, that maybe have an impact on revenue, but they seem like they’re just retaliatory — fighting between kids in the schoolyard.

Anna: It does seem like there are side conversations happening within the tariffs. But I guess the real question for the purpose of our conversation is: do these tariffs affect the markets in Canada?

Bruce: Yeah, they certainly do.

The companies that have probably been hit the most are some of the auto-parts manufacturers, some aviation manufacturers and some recreational-product manufacturers. Those stocks have really been hit quite dramatically here.

For most companies, though, without the market knowing what the real impact is long term, it’s hard to gauge. Sometimes these stocks will sell off really hard one day and then recover the next.

The long-term effect is going to be interesting because we know that the U.S. really needs our commodities.

Ultimately, I think they’re probably skating along a fine line. They don’t want us to say, “Sorry, no access to the commodities,” because they really need those, but they’re trying to get the best deal. This is just negotiation, right?

Anna: I don’t think we want that either. I think we depend on them.

Bruce: No, of course not. They’re our biggest global trading partner. They still are, and perhaps at some point in time we diversify out, but right now, they still are.

Anna: Sometimes shaking things up does shake out a new term or agreement between our two countries, and hopefully good comes from this.

Let’s talk about the election cycle. The election cycle will tell us in the next few months, I guess, perhaps some changes. What are your thoughts there in the next two years?

Bruce: There’s a really strong election cycle that happens.

For the four-year presidential cycle, the way it works is the first couple of years, the new president comes into place and they—

Anna: Like a bull in a china shop?

Bruce: Yeah, they’re a bull in a china shop. Maybe not as much as this one, but typically they come in, they’re a bull in a china shop. They try to make some changes.

Then as they roll into the third and fourth year, they start to focus on—

Anna: “I want to get reelected.”

Bruce: Yeah, “I want to get reelected,” or, “My party needs to get reelected.”

That’s the pattern. As a result, the second year, which is the year we’re in right now, tends to be the weakest for returns if you look at long-term historical returns.

The other interesting point is that most of the returns that come in the second year of a presidential cycle come in the fourth quarter.

So we’ve kind of gone through the worst of what we’re hitting, and we’re just about to hit that strongest part.

Then year three is actually the strongest year of the presidential cycle. This is a little bit like when we talk about seasonality. This is the climate, but not the weather.

Things can change year to year, but this is kind of where the big climate sits.

Anna: Gotcha. We’ll be watching that over the next few months to see if we start going into a different cycle with that.

I mentioned in my intro that the CSE is now trading ETFs. This is really exciting movement for us and really adds some more value to what the exchange is offering as a marketplace.

I think it offers diversity within Canada to have different marketplaces offering ETFs. ETFs have become a real staple, I think, for retail and institutional investors to hold.

It’s something that can hold a basket, and you can have access or exposure to that. Let’s say a gold ETF — you get exposure to a bunch of gold stocks.

I think there’s incredible value, but also the cost-effectiveness of it because it came out with lower management fees than maybe a fund or a mutual fund.

There’s a lot of value, I think, in ETFs, and it’s very exciting that the CSE is now offering those.

From a fund management perspective, is this something that you actively use regularly? Is this something that’s part of your portfolio?

Bruce: We certainly look at and invest in ETFs. It’s not a big part of what we do.

We do it more for specialty areas that we might not be able to get access to, or if we’re trying to do something quickly.

But the ETF market has grown immensely in the last 20 years. Now that is really accelerating. There are more ETFs than there are publicly listed companies, which is an interesting fact.

That market continues to build and grow and get into specialty areas. So I think it’s a fantastic move that the CSE has moved into ETFs, and it’s just one more area where you have the ability to help investors.

Anna: Very exciting. I remember I started as a broker, I think it was 22 or 23 years ago, and they were fairly new — or fairly new for retail investors, anyway.

I think they’re a fantastic product. They’re cost-effective. They give you direct access to very specific pools of commodities or technology, or whatever that might be.

So it’s very exciting that that’s now part of our marketplace.

What should we be thinking about going into next month, Bruce? It’s October next month. It might rain.

Bruce: Being in Vancouver, that’s probably a pretty good assessment of what can happen.

We’ll watch for rain in the markets because the last little bit of September and the first part of October tend to be a little bit weaker.

That can be a huge opportunity because going into the last half of the year and the first half of next year, things are always really strong.

What we’ll want to keep our eye on is what happens with inflation. Does it continue to escalate, and do we continue to see oil prices ramping up, or do we start to see things moderate?

If you look at the year-over-year numbers, when we get into the first part of 2027, we’re actually starting to compare numbers that aren’t as high, so we should start to see a natural progression down in inflation. It depends on how much gets added to this end.

Anna: Okay. Well, we’ll watch out for that.

Thank you so much for joining us here in Vancouver today.

Bruce: Yeah, awesome.

Anna: I think I have you joining us in Vancouver again next month, which is always so exciting to see you in person. We’ll catch up then.

Bruce: Yeah, sounds good.

Anna: Thanks, Bruce.