Canadian and American flags.Reuters
On the brink of a U.S.-Canada trade war, Monday morning looked like a bruiser for the personal finances of the nation.
Both the Canadian dollar CADUSD-FX and the stock market sank, confirming fears that tariffs and retaliatory tariffs would hit us hard. And then, the tension eased. Even before a 30-day pause on tariffs was announced in the afternoon, stocks and the dollar regained some of their losses.
Lessons about the personal finance impact of tariffs – encouraging ones – were highlighted this week for investors, homebuyers and people renewing a mortgage. These points should remain top of mind as we look ahead to a possible restart of a trade war and any further disruptions in Canada-U.S. relations.
In the worst of it on Monday, stocks fell around the world. This is a lesson that a U.S. trade war with Canada, Mexico and China undermines the global order and raises questions about how corporate profits will fare. But stocks everywhere turned around and limited their losses for the day.
Canada’s S&P/TSX Composite Index TXCX-I was down more sharply than global peers. But without the tariff drama, the decline would have been seen as a minor setback in a market that shot up 21.7 per cent in the 12 months to Jan. 31.
It’s possible stock market investors underestimate the damage that a long trade war could cause. But for now, it doesn’t look like the bottom will suddenly drop out of the stock market as a result of tariffs.
Another lesson learned Monday is that balanced portfolios are doing their job. While stocks fell, bond prices rallied. Lots of investors hate bonds because of their sad returns in the past three years, yet bonds should perform well in an environment where tariffs hurt the economy.
Bonds hate overheating economies, inflation and rising interest rates. But the Bank of Canada would slash borrowing costs if tariffs rip into the economy and we fall into recession. There’s a clear path for bonds to do their intended job of cushioning portfolios with some or most of their assets in stocks. A 60-40 portfolio of stocks and bonds should serve you well.
One more way of playing defence in your portfolio emerged Monday – dividend stocks in conservative sectors like utilities. While the S&P/TSX Composite Index fell, Fortis Inc. FTS-T, Emera Inc. EMA-T and Hydro One H-T were even or managed some gains.
As for the Canadian dollar, we learned Monday that a lot of tariff-related concern is already reflected in the value of the currency against the U.S. dollar. There’s potential for a weaker dollar ahead, but also a modest turnaround if a trade war can be averted.
The most encouraging lesson learned this week concerns homebuyers and the 1.2 million people expected to renew mortgages in 2025. It’s starting to look like there will be a Trump discount in the mortgage market.
Interest-rate declines in the past year have reawakened interest in variable-rate mortgages, which are currently comparable in borrowing cost to the popular three-year fixed mortgage, and five-year rates as well.
Tariffs aside, BMO Economics has been looking at further rate relief this year totalling 0.5 of a percentage point. If tariffs damaged the economy, we could be looking at an additional one percentage point in rate reduction. Each cut in the overnight rate lowers interest costs for people with variable-rate mortgages, as well as home equity lines of credit and floating-rate loans.
The rally in bonds on Monday suggests a path forward for lower fixed rate mortgages as well. Fixed-rate mortgages are influenced by interest rates in the bond market, which move in the opposite direction of bond prices. Higher bond prices mean lower bond yields, and they open a door to lower mortgage rates if lenders are in a competitive frame of mind.
There is no modern-day precedent for understanding the effects of a U.S.-Canada trade war on the economy and on household and government finances. And so, we’re left with the lessons from Monday. Keep calm and carry on, whatever happens with stocks and the dollar.
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