U.S. President Donald Trump speaks during a reception for business leaders at the World Economic Forum in Davos, Switzerland on Wednesday.Chip Somodevilla/Getty Images
After brushing off an eventful start to the year, geopolitically, markets finally responded this week with a brief selloff on Tuesday as the U.S. threatened to annex Greenland and impose tariffs on countries that would resist.
A two per cent drop in the S&P 500 might seem rather muted, given the AI images sent from the U.S. president’s own social media account showing a map in the Oval Office with Canada covered in stars and stripes, and with the alliance underpinning Western security seemingly hanging in the balance.
The dip was short-lived, too. On Wednesday, Mr. Trump backed down on his threat to impose tariffs on European countries by Feb. 1, and said the U.S. wouldn’t use force to claim Greenland. Markets rebounded.
Kevin Khang, senior international economist atVanguard Group Inc., says geopolitical events rarely have the impact we expect them to. His team ran numbers going back more than 100 years to quantify how important wars and other upheavals are to markets and the economy.
“The economic impact is a lot less than what we are led to believe or think in the moment,” he says.
Therefore, it’s important to distinguish sentiment in those heated moments from what the economic and financial market implications will be, he says.
That’s especially true with a U.S. president who’s often big on bluster and short on follow-through. As Donald Trump marked one year back in the White House this week, there are lessons for investors from those tumultuous 365 days.
“Oftentimes, you start out with a lot of ideas that are thrown around, and then it goes through phases,” Mr. Khang says. “Whether people like it or not, it feels like it’s a process of negotiation … and then you end up in a place that’s a little narrower and a little more confined compared to where things have started. So, from an economic standpoint, that’s how we’re looking at the current developments for now.”
When Mr. Trump’s second term began, many believed the markets would act as a constraint on the president, who was known for citing stock market performance during his first term. The dramatic “Liberation Day” tariffs were a shock, but the backtracking that followed the market correction last April marked the beginning of the “TACO” trade, for Trump Always Chickens Out.
After the U.S. raid on Venezuela and ouster of President Nicolás Maduro on Jan. 3, some market observers were questioning whether that trade still worked, but this week shows a version of it may still be profitable for dip buyers in 2026.
Mr. Khang says the TACO trade, while catchy, is a bit too narrow. However, he believes markets still have a role to play in shaping policy.
“Our view has always been and continues to be that, yes, we think it’s a pretty valid channel of feedback for just about any policy ideas that are out there,” he says.
More than geopolitical turmoil, Mr. Khang is focused on valuations. Vanguard’s economic and market outlook report for 2026 increases the fixed income allocation for longer-term investors to 60 per cent, and moves away from U.S. tech giants to what the firm sees as more compelling investments: high-quality U.S. fixed income and value stocks, and other developed market equities. (Mr. Khang notes the portfolio is for investors with “a pretty big stomach for large tracking error” against a traditional 60/40 equities/bonds portfolio.)
U.S. bonds are now yielding 4 to 6 per cent without taking on much credit risk, he says, and they’ll provide ballast in the event of a downturn.
Mr. Khang says he doesn’t believe there’s a tech bubble and thinks big tech companies are still going to be “reasonably solid,” even with the very high capital expenditure on AI data centres. However, he says the companies that lead a transformative technological cycle rarely remain the leaders after that cycle ends.
“From that standpoint, we’re not very optimistic about the current leaderboard of U.S. equity,” he says.
Instead, he says it makes sense to overweight U.S. value stocks and developed equities in other markets tied to the old, physical economy that will eventually benefit from embedding AI into their production processes. Canada, with its energy and precious metals companies, could be among the beneficiaries of that rotation.
In a week when Prime Minister Mark Carney spoke at Davos about how the old world order was gone and not coming back, that’s not bad news for Canada.
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