Trump and your wallet: What could tariffs, trade war do to Canadians’ money?
North American stocks are still on another roller coaster this month, it seems, after the extreme volatility seen in February.
Last time, experts largely attributed the price swings to traders adjusting their bets to the prospect of rising inflation and interest rates, after two decades in which both have been at record lows.
This time, though, it’s about scary noises coming from the White House, with U.S. President Donald Trump threatening to impose tariffs on steel and aluminum imports and several countries promising retaliation if that happens.
The World Trade Organization, which referees international trade, has warned that a global trade war sparked by U.S. protectionism could plunge the world into recession. And on Tuesday, Trump’s chief economic adviser, Gary Cohn, resigned over the steel tariffs brouhaha. Cohn was widely seen as an advocate of free trade in the Trump administration, so his departure has sparked fears that people pushing for more and higher U.S. trade barriers will now be calling the shots in the White House.
It’s easy to see why financial markets lost it on Wednesday. The question is, should you?
WATCH: Trump economic adviser Gary Cohn resigns
Here are three ways in which your money might be affected:
The main U.S. stock indices plunged on the news of Cohn’s resignation. As of 11:30 a.m. on Wednesday, the Dow Jones Industrial Average was down 175.23 points, or 0.7 per cent, at 24,708.89, the S&P 500 was down 13.03 points, or 0.48 per cent, at 2,715.09 and the Nasdaq Composite was down 16.65 points, or 0.23 per cent, at 7,355.35. In Canada, the S&P/TSX composite index was rising earlier this morning but had largely wiped out those gains by 1:15 p.m. ET.
If you have savings invested in the stock market, that’s an unpleasant spectacle. For now, however, there’s little reason to do anything different.
“We know nothing yet,” said Brian Belski, chief investment strategist at BMO Capital Markets. President Trump likes tough talk but usually “his bark is much worse than his bite.”
Some reports have suggested Trump could move forward with the tariffs as soon as Thursday, but White House spokeswoman Sarah Sanders suggested Wednesday that Canada and Mexico might get what she calls a “carve-out” for reasons of national security.
Even if Washington did hit Canada with the full steel tariff, economic analyses show that would trigger a GDP reduction of only 0.2-0.3 per cent, said Lorne Zeiler, portfolio manager and wealth advisor at Toronto-based TriDelta Financial.
Belski doesn’t see much impact from U.S. taxes on steel and aluminum imports on either U.S. or Canadian stock markets.
“People need to take a deep, deep, deep breath,” he told Global News.
Zeiler echoed that sentiment. This year will be a bumpy ride for investors, overall, however, he still expects financial markets to deliver “very strong growth.” The U.S. economy is going strong, he notes, and we have yet to see the full impact of the Trump tax cuts.
Still, both Belski and Zeiler identified potential red flags that would change their rather optimistic outlook on the market.
“If major cabinet members [in the Trump White House] started to resign, then I would reserve judgment,” Belski said.
Lorne pointed to the U.S. pulling out of NAFTA or imposing trade barriers across the board. U.S. companies registering slower corporate earnings growth would also be a troubling signal, he added.
And if a trade war were to break out, Canada wouldn’t fare well, said Bipan Rai, executive director of foreign exchange strategy at CIBC World Markets. That’s because we are a relatively small economy that’s very dependent on trade – and because we’re addicted to debt. Both those factors make us especially vulnerable in a global trade kerfuffle, he argued.
Rai’s advice is to start researching ways to “diversify away from the Canadian economy,” i.e. offloading investments tied to Canada, although you don’t need to pull the trigger quite yet.
WATCH: White House mentions potential steel tariff carve-outs for Canada, Mexico
Another way in which rumours of tariffs and trade talks can hit your wallet is through their impact on the Canadian dollar. The loonie is hovering around 77 cents U.S., over 5 per cent lower than at the beginning of February, and experts say it could dive lower if the trade saber-rattling continues.
There are many ways in which this can impact you, and not all bad. Of course, it’s bad news if you’re about to head to Florida for March break and haven’t stocked up on U.S. dollars when the loonie was stronger. On the other hand, if you’re a Canadian investor holding U.S. investments, the exchange rate plays in your favour, noted Zeiler.
In general, a weaker loonie makes Canada’s exports cheaper, which provides a bit of a cushion for the whole economy from any trade punches coming from south of the border.
WATCH: Trudeau says Canada will ‘wait and see what the President actually does’ on steel and aluminium tariffs
A third way in which the tariff saga may make a difference to your personal economy is through interest rates. President Trump doesn’t get to tell the Bank of Canada what to do with its interest rate policy, but belligerent trade talk from the U.S. may force Canada’s central bank to rethink how quickly it wants to raise borrowing costs.
Higher interest rates slow down economic growth, and the Bank won’t want to put on the brakes too hard if trade woes have already thrown a wrench into the economy’s wheels.
The Bank in January raised its trend-setting interest rate to 1.25 per cent from one per cent. On Wednesday, its second scheduled rate review of the year, it kept things unchanged, as economists largely expected.
What it will do next remains an open question, but analysts are starting to revise their forecasts, now predicting one more hike in the latter half of the year or no movement at all until 2019, said Zeiler.
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