Imagine you had a dream that told you about COVID-19 and the coming lockdowns. You decide to sell all your stocks. For a little while, you feel smart because you avoided a big drop in the market.
But then, something unexpected happens. The market starts going up, and it keeps going up, even though the world is still in lockdown and companies are struggling.
Now, think about what would have happened if you hadn't had that dream. If you'd stayed invested, yes, you would have seen your stocks go down for a couple of months. But after that, and especially if you added to your holdings, the gains would have been much bigger than what you saved going to cash.
Basically, having that ‘insider’ knowledge made you miss out on a huge opportunity. You thought you were being clever by avoiding the initial drop, but in the end, staying invested would have made you a lot more money.
Similarly, with Donald Trump in office, tariffs have become an unavoidable reality. Yesterday, he imposed a 25% tariff on Canadian and Mexican goods exported to the U.S. But how do they shape markets? And what about their influence on currencies? These are valid questions, though the answers are far from straightforward.
Tariffs are essentially taxes on imports that increase the price consumers and businesses pay for goods and services. If businesses and consumers can't easily switch to un-tariffed goods, or if our own production can't ramp up fast enough, tariffs will hit the economy hard and push prices higher. Thanks to NAFTA and its successor, USMCA, businesses in Canada, the U.S., and Mexico have woven incredibly complex supply chains. Consider the automotive industry. Automobile parts frequently cross the U.S., Canadian, and Mexican borders multiple times before a single vehicle is fully assembled. This illustrates the intricate nature of our integrated supply chains and the potential disruption and inflationary pressures that will result from these tariffs.
Canada will retaliate with their own set of tariffs. The danger of retaliatory tariffs lies in their escalating nature. They disrupt the smooth flow of goods, leading to a decline in overall trade. This is precisely what happened during the Smoot-Hawley Tariff Act of 1930, where a cascade of retaliatory tariffs triggered a global trade war, severely worsening the Great Depression.
There is no sugar coating this: these tariffs are a significant blow to Canada. We rely on the U.S. for close to 80% of our exports. U.S. tariffs can weaken Canada's export competitiveness and may cause Canadian businesses to pull back on investments. Coming at a time of high household debt and substantial government deficits, they pose a serious threat to the economy. If these tariffs are more than a negotiating tactic and persist for more than a few months, we could witness a sharp downturn in the Canadian economy.
However, when it comes to Donald Trump, unpredictability reigns supreme. Similar to Covid-19, while this tariff uncertainty is causing market volatility, we have to acknowledge that ‘headline’ news is often not a good predictor of future returns. In addition, while we have some Canadian exposure, less than 10% of our portfolio is tied to U.S. goods sales, with the majority of our holdings concentrated in service and technology sectors.
In times like these, we keep coming back to the basics: strong businesses with capable management, bought at sensible prices, will deliver long-term success. In the face of market volatility or geopolitical uncertainty, these are the anchors of a resilient portfolio. These businesses adapt, innovate, and ultimately thrive, even when faced with headwinds. And by acquiring them at reasonable valuations, we ensure a margin of safety, maximizing our potential for long-term growth.
While we navigate the immediate challenges of trade disputes, our deeper concern lies with the growing geopolitical instability. The current U.S. administration is dismantling established international structures and systems that have, for decades, fostered global economic growth and stability. This shift creates uncertainty. The world, absent a clear U.S.-led framework for economic and security cooperation, becomes a more unpredictable and potentially volatile place. Simply put, now is a time to be extra careful and manage your affairs conservatively.
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