Let the Games Begin:
As someone who likes to purchase stocks when the markets are bleeding, I wanted to do a quick discussion since the stock market is basically in freefall after Trumps “Liberation Day”. Was the goal to liberate the US from its financial position in the world? Only time will tell.
After doing a bit of reading as it stands at the time of writing, the net tariffs the US has imposed across the globe are around 22%, which sits at a generous 19% higher than it was pre-Trump. In this Motely Fool article, they point out that every time in history that there has been a small increase in tariffs, even just 0.5-2%, the markets tend to fall around 20%-30% from previous highs within 1-2 years of said increase. This has happened countless times in history like clockwork. Meaning that these “Liberation Day” tariffs of a 19% increase, in theory should lead to the largest stock market decline potentially ever seen assuming this time is not different from history and assuming Trump actually keeps them in place.
Missed the Boat:
My investments are quite highly indexed in the US market as a Canadian. Around 80% of my holdings are in the US. Which has made this somewhat painful to watch, although I tend to ignore the market day to day around 95% of the time. I do not like to sell stocks and at this point I have not. My current plan is to ride this painful fall all the way into the pits of despair because I have a buy and hold strategy as I don’t pretend to know better than the average investor. I also do not have the time or conviction to try and time the market. Generally selling while a market is falling means you have already missed the boat, and you will likely suffer from selling at the bottom and buying back in higher. The best thing you can do when times are tough is to remind yourself that lower prices can be good buying opportunities.
My COVID Market Strategy:
During the COVID market crash I took out some loans to invest in the market near the bottom, I believe it was just after all the central banks decided to cut rates and print obscene amounts of money. The economy bounced back as it became clear that there was support during this unknown and unpredictable event. Luckily for me, the bet paid off.
Should I Do It Again?
At the moment I do not have much cash on hand, so the question I want to answer for myself is should I try to repeat what I did during the COVID market? Is this a prudent financial plan? As of writing, the prime lending rate in Canada is at 4.95% and I have access to loans at the prime lending rate. I would have to make above a 5% return in the stock market each year I’m borrowing money, to justify this plan. I would also have to evaluate the risk of interest rates increasing, which based on where I think the economy is heading overall with rising unemployment, I would consider very unlikely. Further I would have to come up with a somewhat reasonable estimate of the length of time the stock market will be in the dumps and when it will start to recover. With these questions in mind, I began researching.
Bank of Canada Thoughts:
I started with what the Bank of Canada has to say about tariffs and interest rates, as well as the speed of the recovery. This paragraph from an event in Feb 2025 does a good job of summarizing the discussion and the problem.
Initially, they are expecting excess supply in the economy as exports fall, this will likely lead to a short-term jump in inflation. Assuming this jump isn’t too bad we will then have the problem of a lack of demand, due to job losses and lack of business investment in the economy. Canada has already been suffering from poor private sector investment for the past decade or so and this trade war will only make worse.
“Smooth the Decline”:
As Tiff Macklem said they cannot restore lost supply, but they might be able to “smooth the decline in demand” which to me translates to cutting interest rates when the time is right. What might make cutting rates more challenging is balancing lower rates with upward pressure on inflation as tariffs are literally a tax that make goods more expensive.
Projections from the federal rate cuts are sitting at 3 further 25-point rate cuts as of a week ago, but today economists are projecting 4 rate cuts. Meanwhile the Bank of Canada said that they would hold rates prior to all the tariff nonsense. Projections from all the large Canadian economists were an sitting at an additional 2-3 rate cuts from the Bank of Canada in 2025. I think it’s possible Canada sees 3 cuts bringing the benchmark rate down to 2% by the end of 2025 given this tariff shock and rising unemployment. There are risks to the upside that inflation does get somewhat out of control due to the tariffs and the bank is forced to hold or even slightly increase rates. Although I think the bigger risk comes from a lack of employment and economic output, rather than a serious increase in prices.
Pandemic Inflation vs. Tariff Inflation:
Prices increased during COVID because people were unable to work, leading to supply chains getting backed up and no new supply entering the country. At the same time governments and central banks made lending basically free AND pumped trillions of dollars into the economy. This was a perfect recipe for higher inflation. Fewer goods to go around, but citizens with more money or ability to spend it for the reasons listed above. This time around, things are different. People do not have as much money, savings rates are very low, finances are stretched, and unemployment is much higher than it was 2019 or 2022. What we can expect this time is that higher prices will likely result in less demand for goods, leading to contracting GDP growth, and drawn-out recessions. Because of all the safeguards, COVID was not a traditional recession, the recovery was unprecedented and arguably quite easy. This time it is going to be different, we are in for long-term, painful, some would argue necessary, economic damage.
S&P 500 P/E Ratio:
Looking at history, what will likely happen to the stock market is a big drop, followed by years of slow climb as the economy adjusts to this new reality. The only question is how far it will drop. As of writing the Price to Earnings ratio of the S&P 500 is sitting at 23.5 and earlier this year it was closer to 27. Even at a P/E of 23 this would still be on the higher end of an “expensive” stock market, something closer to 20 would be considered “reasonable” and a “good buy”. These tariffs will likely decrease consumer spending and cause earnings to fall; it is easy to see that the stock market might have more room to fall based on this alone. If the E in “P/E” drops, the P will have to follow suit to “equalize” the ratio.
Here’s a good chart of where the stock market was right before the dot com bubble, and where our 2025 market was before this whole fiasco. It looks like the tariffs might just be the catalyst the market needed for a bit of a necessary correction.
Q1 Just Ended (safely), Q2 Will Hurt:
The earnings part of this ratio is yet to be updated as we await company earnings. We just closed out Q1 and earning hits will not show up in financial statements until Q2. It is hard to say if the market will be able to properly price this in, or if Q2 earnings season this summer will lead to another large leg down in the market as we see the real tariff reality reflected in earnings. As the market continues to try and price in the absolute worse case scenario, it is likely going to overshoot to the downside, which is when the buying opportunity should present itself. Only warning I have is to be prepared for a very long and slow climb back up and be prepared for multiple short term drops as the market begins to get more information and a more complete picture of how tariffs are truly impacting the economy.
Short-Term 4-Year Plan:
At minimum it will likely be at least 4 years before things change again. Factoring in a 4-year bleed, I somewhat hesitate to recommend the plan of borrowing money to invest. The state of our economies prior to all this was somewhat bleak, and this will completely shake up global trade. Another potential wrinkle in this policy is that this ends up being a temporary 4-year (or shorter) policy and just causes stagnation until 2029 and then everything returns to normal at that time. Which just means slow to negative economic growth for the next 4 years, as the tariffs will likely reduce trade, which is a huge part of GDP. I would consider this a very likely scenario.
Unfortunately, this being the case would arguably make things even worse in the short-term for Americans as companies will be reluctant to onshore production and invest in long-term plans to build in the US. Which will just result in these companies trying to find other partners to trade with and cut the US out entirely and overall reduce economic activity in the US. Similarly, other countries will find it easier to just circumvent the US entirely which will make things worse for Americans and possibly more expensive for those other countries as well.
Guns and a Foot:
The US will almost certainly see high inflation and job losses because of the tariffs. They will make American companies unable to compete globally and export at reasonable prices as countries start to put reciprocal tariffs in place. Equally, it is possible in my view, that this “Liberation Day” ends up being very short lived. Once the US begins to feel the impacts, markets falling. It is possible that everyone, including those around Trump in the next 6 months to a year start calling for him to revert these policies. If he does reverse course prior to the end of his term, the markets will likely react positively, although they probably won’t return to their highs of January 2025 due to a lack of trust in Trump.
Passing of Time:
As an investor you must balance the possibility of a variety of things happening. It is likely that tariffs will be long and drawn out, but it is equally likely things will go back to normal sooner than later. In either scenario, the US *should* return to a freer trade policy at some indeterminate date in the future. Since this is almost a certainty, whether in this administration or the next. The length of the downturn does not necessarily matter if you are a long-term investor buying with cash you can afford to dump into the market and you have time on your side. My belief is that in the future we will view this moment as a stellar buying opportunity. I think it is a safe bet to say that for the next 4 years, the US will no longer be viewed as a haven for capital. The long-term impacts on US economic dominance due to this policy and other intangible things, will be harder to quantify.
Modern Era Volatility:
Something you might notice looking at a chart of the S&P 500 is that in recent years volatility has increased significantly. This is partly due to the speed at which information travels these days. Reactions to world events tend to be more instantaneous than they were 25 years ago. The decline from the dot com bubble was a 2-3 year long protracted fall, whereas the covid decline was, I’m not kidding, 3 weeks. Then the fed stepped in to “save the market” and the recovery began, within about 6 months it returned to where it left off in Feb 2020. Between 2020 and 2024 there were some ups and downs, with a period of a 20% drop from 21-22, but on the whole things were more stable.
I wanted to point this out because I think the modern era will play into the speed and severity of the decline. I don’t expect the recovery to be nearly as quick as the covid recovery, but I think the sharp declines in the market will continue for a couple of weeks at most, then things will stabilize once all this tariff stuff plays out globally. This makes predicting the bottom a challenge, so the general advice would be to buy in slowly in chunks on days when the market is down over the coming weeks and months. I hesitate to think this decline will be as fast as the covid decline, but the “big” one time shock of these blanket tariffs, the “main event”, has occurred. Whereas during covid, the main event was when everyone realized the speed of the spread of the virus and then governments around the world telling people to stay home. This time it’s Trump telling America to… Well, insert your favourite expletive here.
US and China:
Another impact is that chips from Taiwan will become more expensive. Many supply chains are located abroad, especially in China, and many consumer electronics are manufactured in Chain or Taiwan. With the additional US tariffs, coupled with a lack of consumer spending, you might see stocks such as Apple drop significantly. My suspicion is that consumer spending will effectively halt for a while as people worry about what the tariffs mean for their jobs, and as many people begin losing their jobs during Q2 due to businesses adapting to the tariff shock, they simply will not have any money to spend.
To Borrow or Not to Borrow:
On balance, I think borrowing money right now to invest holds a good amount of risk. There is no guarantee that things will improve. During the covid downturn, the action of the central banks and governments supported economies rather than taking a chainsaw to them. There are many more uncertainties this time around. However, every time in history that the US market has fallen, things have eventually recovered, even if it takes 5-10 years. On top of this, there is a limit to the amount of time that Trump will be in office (for now).
US Global Dominance in Question:
The only assumption that the world has not had to question for the last 80 years, was if the US will remain the dominant economic force. After the Second World War they were riding the high on being one of the most innovative and powerful economies in the world. Today the competitiveness of the US on cutting edge tech, top talent across the world being attracted to the economic machine, is genuinely put into question thanks to this tariff policy. China was on pace to surpass the US as the largest economy decades ago if it played its cards right, and now it is sitting at #2. I suspect this policy will just accelerate the decline in US competitiveness.
I am still somewhat naively hopeful, that the US will come out of this and be able to resume somewhere near where they left off. I believe that they will continue to be on the cutting edge, the spirit of entrepreneurialism is still going to be at the heart of the US. They will continue to export tech and media to the rest of the western world thanks to the dominance of their global superstar firms.
More Room to Fall? China Hits Back:
The market is down about 15% from it’s January peak. Considering these numbers are only starting to bring the market back to realistic valuations, I still see room to fall.
On the “pricing in” tariffs front. China announced reciprocal tariffs today, which caused the already depressed market to drop even more. The United States imports $450 Billion of Chinese goods each year which have a 34% tariff slapped on them as of this morning (which escalated to 125% in the future). Stocks with large exposure to the Chinese market such as Nvidia, Apple, Tesla saw more severe drops than the market overall. Over the weekend, and starting next week, it is likely that other countries will retaliate against the US as well, namely the European Union. Which will lead to more pain in the stock market. Each time another large economy decides to fight back against the US tariffs, it will continue to hurt the US markets more and more. As this builds up, I suspect it will become increasingly likely that Trump will backpedal.
Timing:
With the small amount of cash on hand I have right now, I’m likely going to start buying in slowly. I won’t buy in all at once, I’m going to buy chunks in the next week or two once the drop is nearer to 20%. With a clearer picture now in my mind, I may also take on a small amount of loan risk that I feel I would be able to pay off successfully should that turn out to be a poor decision. When increasing your investing risk, it is also important to consider your stage in life. I am 25, yet to start a major career, but I do not particularly enjoy taking on huge amounts of risk. However, I am young, so taking on a bit more risk makes sense as I have less to lose. Regardless, prudence is important when talking about entire economies getting hurt and people losing jobs. If you are not in a recession proof job, be careful. I do not really have all that much to lose right now, but I also do not want to lose for no reason or lack of due diligence. Calculated risks are important, and I think this is a good time to take action and take on some calculated risk.
With that my analysis of the new tariff scenario concludes. Only time will tell what the outcome is, but I’ll leave you with the age old saying of “buy low, sell high… And hope the US comes to its senses”. We may not be at the eventual low yet, but buying on the way down has proven to be a winning strategy time and time again. Remember, timing the market is a fool’s errand, but if you must try it, be sensible. Trump can do a lot of damage, but I believe the US will still come out of this as a top player on the world stage, even if it takes 4 years for all this to blow over, and even if there are some irreversible problems caused. This time, the investing decision is not as easy as it was during covid, but if you drown out a bit of the noise buying in while things are looking bad and understanding that this is all most likely temporary, is how success stories are built. As always.
Keep Investing,
-Oliver
End Note:
Dividend Stocks vs. Interest:
I wanted to add a bit of an endnote here. Last time when I borrowed money to invest, I did it relatively safely. I mostly purchased stocks that had over a 100-year history of paying out dividends, in a country with a stable economy (which is a bit harder to quantify this time), and I made sure that the dividends they paid out would at minimum cover the interest on my loan, effectively reducing my risk to near zero. I considered any increase in the share price as “free” appreciation. Just wanted to throw this out there as a consideration for investing on margin. Obviously, be careful about the industry you choose. This is just an idea to mitigate some risk while increasing your overall position in the market.