Tariffs - And the Magic Eight Ball

by: Jeffery A. Keill, CFP, CIM, FMA,FCSI

Portfolio Manager and Senior Wealth Advisor

As children, we would search for answers using the Magic Eight Ball. Of course, that is a foolish method for adults to seek answers, as it arbitrarily guides the user without reason, compassion, or purpose. Trusting what President Donald Trump says is much the same, as the answer you get one day will be different than the next. You don’t really know which answer he gives will be the truth, and if we will see any concrete results from it. This Brief Discussion Paper is a follow-up to the previous paper that I wrote on Tariffs in early February, just as the agreement to delay was put in place. I want to once again revisit and update clients on the effects these tariffs and other geopolitical events will have on our portfolios.

There has been incredible noise and volatility surrounding U.S. trade policy under the Trump administration. It has far-reaching implications for markets, and very complex economic alliances. Now that the decision to delay the tariffs has come to an end of the proposed 30 days, tariffs are on the near horizon - both U.S. initiated, and the retaliatory tariffs back in Canada and other trading partners.

In trying to understand the impact of these tariffs, we must keep a few things in mind:

• Short-term pain from political posturing

• Longer-term trade policy entrenchment

• Where there is conflict and volatility, there is always opportunity

Short-term political posturing

This is where rubber meets the road - or in Trump’s world, where Sharpie meets Executive Order. Many of the Executive Orders, as full of pomp and grandeur as they are, can be reversed with the same Sharpie at a moments notice. The more pomp and showmanship an Executive Order has, the more likely it is mostly political posturing and not necessarily a long-term commitment

Why the show if not to create the havoc required to facilitate change? Trump has a habit of using economic threats and tariffs to achieve unrelated goals. With Canada, Trump will use sensationalized comments and misleading numbers about illegal immigrants and drugs crossing the border, topped off with annexation comments, to affect a renegotiated trade agreement.

Of course, even the short-term effects of tariffs can be damaging, but there is a difference between economic leverage towards a structural goal and long-term entrenchment of a policy. The Free Trade Agreement from over 30 years ago was an entrenchment of a general trade policy, a good policy that benefited all parties. During  the past decades, renegotiations around this successful trade agreement were a result of short-term economic leverage, but it did not replace the basic premise of the Free Trade Agreement. Soft wood lumber, aluminum, the auto sector, steel, and energy have often been at it’s core.

A key takeaway from the latest developments in the U.S. trade policy is the administration’s willingness to negotiate - provided counterparties offer political wins. With Canada, this is highly likely with some new agreement being reached. However, the follow through on tariffs against China indicates a more entrenched stance, driven by long-term geopolitical competition rather than short-term negotiating tactics.

With all this said, and after the markets relax to the negotiated changes, the U.S. will remain a strong market and economy. Canada will take a few blows in terms of product availability, cost increases, and job uncertainty. As Canadians, we will take exception to the concept of the term ‘U.S. exceptionalism’, especially since we have recently been one of their many punching bags. In reality, and setting aside patriotic emotion, the U.S. will remain a strong and vibrate economy that cannot be ignored.

With the move to short-term inflicted tariffs, it is likely that central banks will sit on the sidelines with interest rate reductions throughout 2025 as inflation will have crept back in. Further to this, if GPD does reduce as it likely will in 2025 for Canada, the central bank will need interest rates at a level that will allow for monetary easing in the future to combat slower economy and provide consumer confidence. First we will see product availability reduced, then price increases on certain goods, and in a few months hear of the lagging indicators of rising inflation, job loss, followed shortly thereafter by a falling consumer confidence. This will likely create a slight technical recession in Canada. In the U.S., they will experience energy price increase in the northern border states, and some tourist destinations will be hampered as well. All in all - as it has been in the past - the U.S. gets the sniffles, and we get the flu.

Long-Term Entrenchment beyond 2025

Although it is a commonly held belief that most of the unilateral tariffs are political posturing, there remains a risk that some renegotiated trade alliances will not be in Canada’s favour. This is highly likely, as we have little economic advantage in the long-term to compel the U.S. Administration otherwise. Once again, I want to restate as I have in the past: it is not absolute change that makes the greatest impact, rather the velocity of the change. Given some time, Canada will once again be a thriving economy regardless of how the dust settles. Companies, consumers, and society adapts and adjusts. It is a classic case of “order-chaos-reorder”.

Investment Portfolio Positioning for a Volatile Trade and Growth Environment?

Until recently, markets have been in a temporary holding pattern as the 30-day pause took place. As we are now passing into the implications of tariffs, we need to focus on not only protecting the portfolio, but investing where there is opportunity. If history is any indication, Trump’s tariffs could reinforce U.S. exceptionalism in the stock market. In 2018, mid - and large-cap U.S. equities significantly outperformed their global peers after the initial round of tariffs, a trend that could repeat if trade policies follow a similar trajectory - as such, our portfolio remains overweight in U.S. In Canada, there will be some hard-hit sectors, but at the same time there will be opportunities in other sectors as Canadians refocus their habits and their spending to patriotic purchases, and the lower Canadian Loonie provides a somewhat natural buffer to tariffs.

The portfolios we oversee have resilience built into them in several logical ways. This has proven successful in many prior times of volatility. First, we utilize an active sleeve where portfolio managers actively reposition holdings to take advantage of opportunities. I believe this sleeve will be an important contributor to the portfolio mix over the next year. Second, we manage very diverse portfolios with underlying securities that comprise of thousands of holdings throughout the world, only a portion of which are Canadian. It is important to understand that investment decisions are not based on emotional biases. Just because we tilt some of our portfolios towards non-Canadian holdings, does not mean that we don’t love our country. Failure to recognize this emotional bias will lead to a real failure to having a successful investment outcome. As much as I am a proud Canadian and will defend our country, we need to separate our investment decisions from our patriotic views. The third point I need to make: we do not only hold stocks! This is important to realize as we try and balance the reality of our investment exposure, fear, and noise from the media. For example, our Balanced Portfolio strategically holds 40% of its assets in Bonds. Our Conservative Portfolio has about 70% in Bonds. That is significant, especially since the Bond market has been on a rally as of late. Of course, the media does not speak about the bond rally as it does not make sensational news. Bonds provide a solid buffer in a volatile stock market most times - but not always, like a teeter-totter. When stocks go down, bonds frequently go up. This can result when investors flee from risky assets to safe assets (such as bonds).

Summary

Here are the main points to remember:

1. Stay the course and understand that the portfolios, although effected by the tariffs, will not be affected to the degree you are likely fearing. The portfolios are resilient and well diversified.

2. Rest assured that if over time this is a change in trade agreements, it is not a global collapse. The storm will pass and we will be upon smoother waters again.

3. DO NOT try and time out your investments under the emotional fear of loss only with the false promise of a better buying opportunity later.

4. If you are in the right portfolio that matches your objective - which you likely are - stay the course. Let economic history be your guide, and not your emotions.

Disclaimer and Notice to Reader:  This Discussion Paper should not be construed as legal, investment, or tax advice but rather only as a general statement and explanation of the topic matter.   Professional investment,  tax, and legal advice should be obtained for the readers own personal situation.  For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.  

Last Updated 03/07/2025