5 thoughts for investors in light of the U.S. tariffs plan
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By John Bai, CIO, Aviso, CIO, NEI Investments
The tariffs plan that the Trump administration announced on April 2 is a major departure from multilateral trade agreements that have been in place for the past 75 years.
The last country to aggressively raise tariffs like this was the U.S. in 1930, during the recession that followed the 1929 stock market crash. Tariffs, it was thought, would help the US farmer and bring jobs back to America. But instead, it turned a recession into the Great Depression. Canada and Europe responded with reciprocal tariffs, US exports plunged by 61%, domestic prices jumped, and unemployment surged past 20%.
So far, history is repeating itself. Countries around the world are responding with reciprocal tariffs, looking for economic alliances beyond the US. Furthermore, US consumer confidence is plunging, inflation expectations are at 30-year highs and economists are busy downgrading their U.S. economic forecasts for 2025.
When we started the year, US exceptionalism meant a world where US economy and stocks were exceptionally strong. But by turning more isolationist, tariffs are turning the US from an open economy to a closed economy. This will be a world where the US and global economic growth will be lower, prices will be higher, consumption contracts and unemployment rises.
Does this mean we need to steel ourselves for a recession? Maybe, but the US economy is much stronger today than it was in 1930. Back then, the economy was already falling, and tariffs just amplified the downward trend. Today, employment is strong, and the Trump Administration can boost economic activity and confidence by changing the talk track to tax cuts and deregulation. But the longer they wait, the higher the risks. Globally, risks are high too. The US just restricted access to the world’s largest economy. Highly export oriented economies like Canada, China, Europe and Japan now have difficult decisions to make. Countries around the world are responding with various countermeasures, including reciprocal tariffs, and looking to establish new economic alliances beyond the U.S.
What do these shifts mean for individual Canadian investors? Here are five thoughts:
- Dividend income, fixed income, and defensive segments
In an environment where growth expectations are lowered, dividend income becomes more important. For investors who expect a mid-single digit return, consider starting with fixed income, stocks with a high dividend yield, and stocks in defensive sectors that are less economically sensitive. Valuations are better on dividend paying stocks, and fixed income has been providing the offset against the equity drawdown. - European and global mandates
Recession risk has heightened with the imposed tariffs amidst the drop in economic momentum in the U.S. In Europe, although the economic momentum is improving, it could be short-lived as the impact of tariffs is expected to be significant to their economy. U.S. stocks continue to trade at extremely high valuations despite the 15% drawdown from the peak while Europe continues to trade at more attractive valuations. The U.S. dollar continues to be expensive on a purchasing power basis while the Euro remains cheap, making European equities less vulnerable to drawdown versus U.S. equities. - Increase diversification
In periods of volatility, avoid putting all your eggs in one basket. A highly diversified portfolio can weather volatility better than a concentrated one. When a particular segment of the portfolio goes down, other areas may go up, mitigating the losses. We find that a 60/40 portfolio (60% equities, 40% fixed income) is well positioned for these more volatile markets. - Alternative investments
One of the main benefits of alternative investments such as long-short funds or private equity/credit is their lower correlations to traditional asset classes like stocks and bonds. This asset class has additional risks as well. As always, ensure you do your research to assure the appropriateness of these investments in a portfolio. - Stay invested
Remember, stock markets go up over time. Based on decades of market data, investors should expect that a 10% pullback once every 17 months. Yes, the U.S. market is experiencing that now, but that is mainly because President Trump is focused on tariffs, which is a growth-restricting policy. We expect him to switch the narrative to more stimulative policies of tax cuts and deregulation. If this happens, risk on assets like stocks should rally.
While market drawdowns can be unnerving to investors, making emotional investment decisions can be detrimental to long term investment results.
This material is for informational and educational purposes, and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. The views expressed herein are subject to change without notice as markets change over time. Information herein is believed to be reliable, but NEI does not warrant its completeness or accuracy. Views expressed regarding a particular security, industry or market sector should not be considered an indication of trading intent of any funds managed by NEI Investments. Forward-looking statements are not guaranteed of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Do not place undue reliance on forward-looking information.
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