Over the weekend many of us watched the calamity unfold surrounding the tariffs that will be placed on Canadian, Mexican and Chinese goods as they come into the USA. In response to that, Canada specifically has issued tariffs of its own on US goods entering Canada. Thus the beginnings of a trade war.

 

Keep in mind that tariffs aren’t brand new to Trump. He spoke about them throughout the entirety of his campaign and said on his inauguration that they would begin February 1st. Doubled down on that last week and made them almost a certainty mid Friday afternoon. The market was very sanguine about the tariffs. Not really making any major moves and even this morning I’m finding the reaction is fairly mild.

 

I think the reasoning here is that very few business people, very few economists, and very few market participants see the sense that adding tariffs to its largest trading partners could make any sense to the American economy, nor the American consumer who voted Trump in for a second time. Something we can look back on is the trade war he sparked with China in late 2018. I remember the market falling in December 5-6% and recovering very quickly through January and February. Was a resolution made? No, that same trade war is still going on today. What happened was the Yuan weakened at that time effectively lessening the cost of the tariffs to the US, and that very well could happen some extent in Canada.

 

None of that is to say a trade war and tariffs are fine or won’t have an impact on the Canadian economy. I think the opposite is true, it will have a significant impact, as it will for the US and that is not something we think Trump will be able to live with over the longer term. As of this morning, he’s walked back the Mexican Tariffs a month as they promised increased border security. As we’ve seen in his past term, he often finds a way to take a win away from a situation that was going poorly. We’ll have to see this play out over the next few weeks and months before we get some clarity on whether or not that will be the case. Although the impacts will be felt throughout the economy, we have to keep in mind that the individual companies we own and what their specific impact will be on the Canadian and the US side. For the companies that are well insulated, this could be a lesser event for them. For the more exposed companies, we are currently working at going through that list and deciding if we want to wait and watch this play out or if we can find better opportunities elsewhere.

 

I know very well from market events over the past 20 years that the initial emotion is to sell and wait on the sidelines. Although this seems like it could have merit, it’s often the wrong approach. Things change daily and we can’t be certain on how this settles out over the coming months. I think the best approach is to not let any emotional response get in the way and strategically work our way through the holdings and assess the impact. Even today I’ve seen some companies sell off as much as 12% at the market open, only to wind up down 4-5% at time of writing. This downturn at the open is the result of impulsive selling without properly assessing the situation. We won’t get caught in this and are much more confident moving forward and reassessing our overall strategy. We have been doing this in the background since the election started and have moved off some of the companies with heavy US reliance, which is something that we will continue to review and monitor.

 

Our portfolios are always centered around our clients’ needs, and if we are drawing funds for retirement or major purchases we will account for that in your investment strategy. Volatility like we’ve seen over the weekend, although it can have an immediate overall effect on the portfolio, it should have much less of an impact on your long-term planning and goals.

 

We collectively have spent a lot of time over the last few months and more over the past weekend being as up to speed as we can amidst the uncertainty. We’ve collected a database of all of our Canadian holdings to determine the revenue exposure to the US. This will help us make proper and informed decisions going forward. If you want to talk more specifically about your situation or portfolio, please give us a call any time.