There never seems to be a “good” time to write these updates. Trump continues to keep the world on its toes with the implementation of tariffs and what, if any, concessions he may be willing to make. In fact, this week may mark the start of a series of new tariffs on Canadian goods, making it a particularly eventful week. April 2nd marks the infamous “Liberation Day” whereby Trump plans to release reciprocal tariffs on all countries seen to be “taking advantage” of the United States. We have yet to receive clear guidance on what those tariffs will look like, but Prime Minister Carney has threatened retaliatory tariffs in response.
Effective April 3rd, a 25% tariff will be applied on all vehicles entering into the U.S. The levy is targeting vehicles that are fully assembled outside of the country, in an effort to relocate manufacturing to the U.S. These new tariffs will arrive at the same time as the end of the initial one-month reprieve given to USMCA exempt goods, and the steel and aluminum tariffs that are currently in place.
Despite this tariff uncertainty, the Canadian market has fared quite well, with the TSX outperforming the S&P year to date. This is in large part the result of certain mitigating factors, namely:
- The weakness of the Canadian Dollar which has helped support exporters;
- Unlike in the U.S., Canadian companies have relatively low valuations, making them more attractive to investors;
- In general, the Canadian market has a smaller exposure to sectors that are heavily exposed to tariffs, such as aluminum and automotive, while having a larger exposure to non-Canadian revenue sources; and
- The Bank of Canada has already cut interest rates in an effort to mitigate the impacts of tariffs and has room for further cuts if need be.
If the tariff uncertainty wasn’t enough, Canada will also be facing an upcoming federal election, set to take place April 28th. Mark Carney was recently appointed the new Liberal leader, taking over from Justin Trudeau as current Prime Minister. Leading up to the Liberal candidate race, the Conservatives were well ahead in the polls. However, Carney has pivoted the Liberal Party away from the far left and closer to the center of the political spectrum, which seems to have given the Liberal Party a fighting chance in this election.
If you’re wondering which political party will drive stock market returns – not much can be concluded from the historical data. Although markets have technically performed better, there are many outside factors contributing to these outperformances, making any correlation difficult to conclude. In fact, Canadian politics plays a much smaller role in market returns than investors might think. An election will increase the volatility in the market in the short term, with government economic policies influencing specific industries, but the broad market over the long term is more closely aligned with corporate profits and cash flows. Companies adapt to changing policies by adjusting capital allocation and optimizing operations to sustain earnings growth over time.
That being said, the election is only compounding an already volatile market, which tends to benefit high-quality bonds as investors try to protect against equity downside. In that regard, we continue to favour fixed income over equities, while keeping our U.S. exposure underweight. We expect our fixed income to outperform in the short term, while also providing high yields to help bolster our annual rate of return.
We will be closely monitoring this week’s developments on tariffs and we will provide another update as new information becomes available…. and hopefully our weather improves in the meantime.
Livingston Wealth Management Group