What the pandemic has to teach investors about surviving the trade war

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For the second time in five years, Canada is confronted with an existential economic threat.

It was this week in 2020 when COVID-19 officially became a global pandemic and put much of the world into lockdown. Every country was forced to fend for itself against a health catastrophe with an economic crisis on its back. Canada was staring down the barrel of a depression-level economic collapse.

In 2025, the devastation of the Canadian economy is suddenly back on the table. While the contours of the trade war are still taking shape, punishing tariffs have exposed Canada’s dependence on the U.S. as a fatal flaw at the heart of the domestic economy. There are a million-plus jobs at risk in a recession that could rank among the worst in modern Canadian history.

While the pandemic and the trade war may seem like an unlikely comparison, they have more in common than at first glance.

For starters, both originated as a kernel within a single entity that morphed into something far more dangerous. Some years ago, a thumb-sized bat in China likely played host to the virus that set off the pandemic. Our current predicament, on the other hand, mutated from an idea in the mind of Donald Trump that the world’s most powerful economy was somehow being “ripped off” by its northern neighbour.

In some respects, it would be offside to equate the two episodes. The pandemic’s toll is measured first and foremost in the millions of lives lost. Economically, it represented the mother of all supply shocks, since so much of the world’s production capacity was taken offline.

“It didn’t matter how much money you had, you may not have been able to buy a car because the factories were shut down,” said Craig Jerusalim, senior portfolio manager at CIBC Asset Management.

It’s a little different this time. It’s not so much a global economic catastrophe in the making as it is a Canadian one. Arguably, no country has more at stake in this trade war than Canada.

Over the past couple of months, Canadians have felt their status quo unravel in ways that echo the early days of the pandemic. The shock of having America’s economic might weaponized against us. A President whose objective seems to be “a total collapse of the Canadian economy,” as Prime Minister Justin Trudeau laid out in the grimmest possible terms last week.

This is a surreal moment that calls for Canadians to remember the hard-won economic lessons of the pandemic. About the resiliency of financial markets. About the power of policy to mitigate the damage. And about the awakening of forces we assumed were relegated to the pages of history.

In the stock market, time heals all wounds

Cast your mind back to March, 2020, when a master switch that no one knew existed turned off the global economy. At that point, investors had every reason to succumb to fear, to liquidate their assets and bury their money in the backyard.

In a span of 21 trading days, the S&P/TSX Composite Index was down by 37 per cent and there was no reason to think the crash would stop there. The mood was apocalyptic and policy makers were openly contemplating a repeat of the Great Depression. Who was to say your stock portfolio wouldn’t be reduced to pennies on the dollar?

As Peter Lynch famously said, “Everyone is a long-term investor until the market goes down.” Watching your life savings evaporate in real time is a powerful motivator. Investors get scared and they sell.

“The one and only real mistake a long-term investor can make is selling stocks close to the bottom,” Mr. Jerusalim said. “The tricky part is when to get back into the market. You think, ‘I’ll wait for it to fall just a little bit more.’ Then by the time you know it, the stock market has recovered.”

Although the pandemic was a once-in-a-century disaster that would change the course of history, the stock-market panic was over in less than a month.

Once the bottom was set, Canadian stocks leapt by 12 per cent in one day. That’s better than the average year. Within two weeks, the benchmark index was up by 20 per cent. And by the time the market fully recovered in less than a year, the gains stood at 60 per cent.

It’s still early days in the on-again, off-again trade war. But the selloff in U.S. stocks is starting to feel dangerous. If the pandemic taught investors anything, it is to stay invested through it all. “The stock market is unbelievably resilient,” Mr. Jerusalim said.

The stimulus effect

When the pandemic sent much of the global work force home, central banks and governments unleashed trillions of dollars in stimulus spending. The U.S. Federal Reserve, for example, announced more in emergency aid over a two-week period in the spring of 2020 than it did through the entire global financial crisis.

Meanwhile, central banks’ purchases of securities effectively backstopped financial markets, helping set the stage for the booming revival of risk appetite. Since this approach was broadly effective in warding off a global depression, investors should expect the same playbook to apply to the current crisis.

“We have tried and tested tools to get our people through the toughest of crises and we will not hesitate to use them,” Employment Minister Steven MacKinnon said last week while introducing a $6.5-billion package of loan-based supports for businesses harmed by tariffs.

Two lessons jump out from the policy response to the pandemic. First, getting money out the door quickly was rightfully the order of the day, said BMO senior economist Robert Kavcic. “But it was the unwinding of all that that was probably where the mistakes were made.”

Policy remained deeply stimulative long after it was needed, helping to inflate asset bubbles and stoke inflation.

Secondly, the pandemic saw the government put many billions directly in the hands of households and businesses. This time the feds should incentivize businesses to reorient to new markets through lower taxes, reduced interprovincial trade barriers, and infrastructure projects, Mr. Kavcic said.

“We need to fundamentally improve the attractiveness of Canada as a place to invest and allow businesses to make their own decisions in terms of how to redeploy capital and restructure the economy.”

History is still with us

One of the most jarring lessons of the pandemic was the realization that we are not immune to the kind of mass death and economic depression that was the stuff of centuries prior.

Similarly, Mr. Trump represents the resurrection of economic threats from a bygone era. Since the Second World War, the world has moved toward globalization and the integration of economies. Economic consensus is clear that free trade is a net benefit because it guides production to countries that have a comparative advantage in a given industry.

Mr. Trump has taken us all back to 1930, when the Smoot-Hawley Tariff Act triggered a global trade war that is now seen as having worsened the Great Depression.

The President may not be alive to the risks of economic nationalism, but because of him, the rest of us must be.