The trade war has revealed something about U.S. stocks compared to Canadian ones.
No, not that U.S. stocks are bigger, better and more resilient.
What we’re actually seeing is that shares of U.S. companies were more overvalued going into the trade war, and now they’re falling harder and faster. Who would have thought? The U.S. is dominant in most economic and financial indicators, including stock market gains over virtually all time frames going out two to 20 years.
The trade war has led to a reappraisal of both Canadian and U.S. stocks in light of the economic uncertainty ahead. Tariffs are being used by U.S. President Donald Trump as a way to create a useful revenue stream to fund government initiatives such as tax cuts while also powering up the country’s industrial base. The expectation is that companies will move production to the U.S. to avoid tariffs on imported goods.
But tariffs also hurt the economy by contributing to inflation and disrupting supply chains. Falling share prices indicate investor concern about how corporate profits will be affected in a trade war with not just Canada, but Mexico and China as well.
Globeinvestor data show the S&P/TSX Composite Index was down 4.8 per cent in the past three months, the S&P 500 was down about 9.5 per cent and the Nasdaq 100 Index was down about 11 per cent.
The sharper decline in U.S. stocks results from a sharp pullback in the shares of some high-profile tech companies that led the market in previous years. Examples are Nvidia Inc. (NVDA-Q) and Microsoft Corp. (MSFT-Q), both down about 16 per cent in the past three months.
Sharp as these declines are for the U.S. market, they still leave the S&P 500 with annualized total returns of 15.5 per cent and 11.9 per cent over the five- and 10-year periods to Feb. 28. That compares with 12.7 per cent and 8.5 per cent for the S&P/TSX Composite Index over the past five- and 10-year periods, respectively.
Canada’s economy is more vulnerable in a trade war than the U.S., and further declines in the S&P/TSX Composite Index should be expected if tariffs aren’t lifted soon. But the first two weeks of the war have revealed a surprising reality. The high-flying U.S. market might just have further to fall.