On Monday, Donald Trump will be inaugurated for the second time and become the 47th President of the United States. When I speak to clients these days about the concerns they might have about the market and their portfolio, the threat of tariffs is clearly their number one concern. I want to address this issue and share my views on how I think this is likely to play out. Obviously, no one has a crystal ball but we do have history as a guide and an understanding of how the stock market works.
Before we dig in, let’s define what a tariff is and how it works. A tariff is essentially a tax that a government imposes on an import from another country. For example, if Canada imposes a 25% tariff on the import of oranges from the US, the importer (say, Sobeys) will be required to pay that tariff. Sobeys then has a choice: does it pass on that cost in whole or in part to the customer or does it absorb it and make less profit? Chances are very good that Sobeys will try to pass that cost on to their customers so you and I are the ones who will eventually pay. I would be willing to bet that customers of Sobeys are going to buy less oranges as a result and this will end up hurting orange growers in the southern US. Orange growers will then protest to their local Senator or Congress Person to put political pressure on the federal government to reduce or eliminate tariffs. Tariffs are tricky. They can be used effectively to protect domestic industry and jobs but if they are too high, it can have the opposite effect. The bottom line, though, it is consumers that end up paying, not governments.
To predict how this might affect your investment portfolio, it is essential to understand that the stock market is forward looking. No one drives a car by looking in the rear view mirror and the market is the same. There are thousands and thousands of people every single hour of every single day who are analyzing everything from economic indicators to weather forecasts to company forecasts to try to predict where money can be made and where it is likely to be lost. In the first 2 weeks of the year both the US and Canadian stock markets are up about half a percent. I am not trying to minimize the threat of tariffs and what it may do to the North American economy. However, the market is telling you that it does not see a major economic slowdown. If it did, markets would be down already. This is not to say that markets are always right but all the great investors of history have one thing in common: none of them think they are smarter than the market.
We have seen this movie before. During Trump’s first term as President, he threatened and followed through on tariffs that hurt certain industries in Canada. They did, however, turn out to be temporary and did not have a material effect on the North American economy and until Covid appeared, the markets performed extremely well. Tariffs are not my number one concern right now. Inflation and interest rates are still an issue and those are the factors that are moving markets today. I am not stating a political opinion when I say that I am extremely confident in the Canadian Government’s ability to respond to the tariffs to protect our interests. I am also extremely confident that Canadians are much more willing and prepared to endure any economic slowdown than Americans are. Angus Reid agrees with me. They just did a poll that suggests Americans are not prepared to pay higher prices because of tariffs we may impose: Americans oppose Trump’s tariff against Canada 2:1; support drops further when they consider the price of gas –
I read Trump’s book, The Art of the Deal, 30 years ago. The only thing that surprises me is that people seem surprised by what he doing. His bark is always bigger than his bite and I expect it to be the same this time. I suggest watching this interview that former Prime Minister, Jean Chretien, did this past week. I think he offers a balanced perspective that has been sorely missing in the media on this issue: U.S. will ‘suffer much more’: Chrétien on possible trade war | CTV Question Period. Chretien gives a good reminder that Canada has enormous leverage in these negotiations.
I am hoping that all this works out in our favour but to be on the safe side, I have adjusted my portfolios to be more defensive just in case. In particular, I have reduced exposure to energy which I believe would be disproportionally affected by and economic slowdown.
If you have any concerns or questions about anything, don’t hesitate to reach out to me.
