The political uncertainty facing Canadian advisors and their clients doesn’t just come from south of the border. Petursson explains that the recent prorogation of parliament and Prime Minister Trudeau’s announced resignation pending the selection of a new Liberal Party leader has introduced a greater degree of uncertainty for Canada.
While the threat of tariffs and uncertainty around the state of Canadian governance could introduce some headwinds for investors, Petursson accepts that some of the current political environment could feed into a more normal balance between inflation and interest rates. One of the forces that kept prices low following the GFC was globalization — along with the rise of ecommerce. Trump and many other world leaders have reversed course on globalization somewhat which may result in a higher resting inflation rate.
Tariffs are part of that de-globalization policy being pursued by the President Elect and their imposition could shock equity markets somewhat. Petursson looks to the past for guidance. He notes that President Trump imposed tariffs on Canadian goods once before, in 2018 during his first term. He notes that while we saw a small shock on both the S&P 500 and the TSX there was a fairly quick recovery. Moreover, the S&P 500 was impacted more heavily and for longer.
Petursson says that a 25 per cent tariff would be quite negative for US and Canadian markets, enough that he would revise his 2025 market outlook, which offers an otherwise favourable view of returns for the year. He believes, though, that 25 per cent blanket tariffs are not the likely outcome and that the restrained tariffs we saw in 2018 may be more of an indicator of where President Trump might go with his Canadian trade policy.
Looking internally at US monetary policy, there has been some speculation that the more inflationary aspects of Trump’s proposed policies might mean the US Federal Reserve slows down its interest rate cuts. Petursson believes, however, that the Fed will continue to cut in 2025 until it hits a terminal rate of around four per cent. That is slower than the market initially priced in a year ago, but does reflect a degree of continued easing.
