All things being equal, 2025 should be shaping up as a good year for the Canadian economy in general and the TSX in particular.
Interest rates are down and are poised to fall even further. Inflation appears to have been tamed, at least for now. The economy may be sluggish but seems to be headed for a soft landing.
At least it was until president-elect Donald Trump announced his intention to slap a 25-per-cent tariff on all imports from Canada and Mexico on the day he takes office, Jan. 20.
Ostensibly, the tariffs are in direct response to migrants and drugs pouring into the U.S. Mr. Trump said they will remain in place until both countries tighten up the borders. Until then, Canada and Mexico will “pay a very big price!”
The policy is absurd on many levels. To equate the Canadian and Mexican borders in terms of porousness is bizarre. To suggest only Canada and Mexico, but not the U.S., will pay a price is disingenuous – the U.S. economy will also take a big hit.
Moreover, it now appears that whatever we do about the border will not be enough. Mr. Trump has since claimed that the U.S. is “subsidizing” Canada to the tune of $100-billion a year. Based on comments he made Monday, he appears to be equating this to the trade deficit the U.S. incurs with Canada.
But that may be just another excuse to promote the “greater America” vision that has emerged since the election. His “51st state” remarks and his comments about Greenland and the Panama Canal all seem to be setting the stage for an expansionist foreign policy aimed at unifying the North American continent north of Mexico under the American flag and regaining control of the Canal Zone.
This aggressive approach couldn’t come at a worse time, with the federal government now leaderless after Prime Minister Trudeau’s resignation announcement. If, as expected, Mr. Trump imposes his 25-per-cent tariffs on Jan. 20, we have no credible person to stand up to him.
For different reasons, Mr. Trump is also seen as a threat to U.S. stock markets this year because of the uncertainty he brings to the Oval Office. Investors like his tax reduction and regulation-slashing policies. They don’t like his tariff plans, which could raise U.S. prices on everything from oil to clothing, while squeezing profit margins for a wide range of companies.
All this makes predicting what will happen this year extremely difficult. Mr. Trump is more than a wild card. He’s like a flock of black swans descending all at once.
Let’s start with an assumption. Mr. Trump will go ahead with his announced tariff plan on Jan. 20. That will have a modest negative impact on U.S. stocks. The TSX, by contrast, will probably get hammered, if it hasn’t already fallen enough to offset the blow.
The longer the tariffs remain in place, even with a carve-out for oil, the greater the pressure on Canadian stocks. Even the banks, which at first glance would seem to have little exposure to tariffs, will be affected by a slowing economy. Many economists have said that the result will be a Canadian recession by mid-year. And it could drag on if Mr. Trump’s real motive is to tighten the screws in an effort to force Canada to meet his demands – whatever those may be.
Based on these assumptions, here’s what could happen in 2025.
A down year for the TSX. We could be looking at a worse loss than in 2018, when the Composite fell 11.64 per cent. If the tariffs remain in place for the full year and Mr. Trump’s rhetoric continues to threaten Canada, we could approach the loss of 35 per cent incurred during the Financial Crisis year of 2008. That’s a worst-case scenario but it’s not outside the realm of possibility.
U.S. stocks will do better by comparison. The U.S. markets were winners during Mr. Trump’s first term and there is a lot in his policy platform that investors still like. I don’t expect returns on the order of those we saw in 2024, but a gain of 10 per cent or more on the S&P 500 would not be a surprise.
Offshore markets will suffer. Mr. Trump’s America-first policies will spark trade wars that will hurt all involved. Europe is especially vulnerable, and already, the once-powerful German auto industry is showing cracks. China is being targeted with outsized U.S. tariffs and its economy is already struggling. Emerging markets should be avoided.
Bonds will rally. I sound like a broken record on this one, but the conditions suggest bonds will do better this year. Interest rates will fall as the economy feels the tariff impact, and long-term bonds should generate the largest price gains.
Cash will pay less. As we saw last year, falling interest rates knocked back yields on GICs, high-interest ETFs, and similar securities. Look for more of the same this year.
Our dollar will continue to fall. The combination of U.S. tariffs and easing by the Bank of Canada will continue to put downward pressure on the loonie. In January, 2002, our dollar hit its all-time low of 61.79 cents versus the U.S. dollar. If worse comes to worst, we could test that level this year.
This is a bleak scenario, and I hope it doesn’t come to pass. But I don’t like the vibes the president-elect is giving off. He is emboldened, determined, has a compliant Congress, and has a strong mandate to do whatever he wants.
To sum up, your plan for 2025 should be to lighten your Canadian stocks, add to U.S. equity positions, increase your weighting in long-term bonds, and keep at least a portion of your cash in U.S. dollars.
More from Gordon Pape: A scorecard for my 2024 market predictions
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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