Category: Global Economics

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”, I think he meant he wants to liberate the US from it’s money.

After doing a bit of reading the net tariffs the US has imposed are around 22% overall, which is 19% higher than it was last year. After reading this Motely Fool article, they point out that every time there have been small increases in the tariff rate, 0.5-2%, the markets tend to fall around 20%-30% from past peaks, this has happened countless times in history. These “Liberation Day” tariffs are 19% higher, so it’s likely this will be one of the largest stock market declines potentially ever seen, (assuming Trump’s administration keeps these in place, who knows).

Missed the Boat:

I’m quite highly indexed in the US market as a Canadian, around 80% of my holdings, so this has been somewhat painful (well not really since I tend to ignore the market day to day). But as far as my investments go I don’t really like to sell my stocks, and I haven’t. I’m planning to ride this painful fall all the way into the pits of despair, as I don’t have the time or conviction about the timing of the bottom to sell on the way down and then hope to buy at a lower price. Generally selling while a market is falling means you’ve already missed the boat.

My Covid Market Strategy:

Last time, during covid, I took out some loans to invest in the market near the bottom. Then the recovery started because the central banks made it very clear they would cut interest rates. The economy bounced back as it learned how to manage this unknown event. Yes there were supply chain disruptions, but the fundamental hyper-globalization of the world economy wasn’t put (as much) into question.

Should I Do It Again?

Since I don’t have much cash on hand right now, the question I want to answer for myself, is it a good idea this time to take out loans to invest? Is this a prudent financial plan? As of writing, prime rate is at 4.95%, so I’d have to make above a 5% return in the stock market each year I’m borrowing money, in order to justify this plan. I’d also have to try to evaluate the risk of rates increasing. I’d also 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, which Canada has already been suffering from 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” a.k.a. cut interest rates, which they’ll try to balance with upward pressure on inflation, a.k.a. don’t cut them too much.

Projections from the federal reserve were sitting at 3 further 25 point rate cuts as of a week ago, but today economists are projecting 4 cuts. Additionally, while the Bank of Canada said itself that they would have liked to hold rates prior to all the tariff nonsense, the projections from all the large Canadian economists were an additional 2-3 cuts for the Bank of Canada in 2025. I think it’s possible we also see 3 cuts bringing the benchmark rate down to 2% by the end of 2025 given this tariff shock. There are risks to the upside that inflation does get somewhat out of control due to the tariffs (which inherently increase prices), and the bank is forced to hold or even slightly increase rates, although I think the bigger risk comes to lack of productivity and output, rather than serious increase in prices.

Pandemic Inflation vs. Tariff Inflation:

The reason prices increased so much during covid was that people were unable to work leading to supply chains getting backed up, then governments and central banks pumped trillions of dollars into the economy. This was a perfect recipe for higher inflation. Fewer goods to go around, but citizens with more spending power for various reasons. This time around the dynamics are different, people don’t have as much money floating around, savings rates are in the gutter, people are already stretched, there aren’t as many good jobs around as there was in 2019. What this means is that higher prices will likely just result in less demand for goods, leading to contracting economies and drawn out recessions. Covid wasn’t really a traditional recession, the recovery was unprecedented. This time is going to be different, this is going to cause long term, painful 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. Another thing to consider is that looking at the Price to Earnings ratio of the S&P 500, it’s hovering at around 23.5 as of writing and earlier this year it was close to 27. Even at a P/E of 23 this is still on the higher end of an “expensive” stock market, something closer to 20 would be considered reasonable and a good buy. Since these tariffs will likely decrease consumer spending and cause companies earnings to fall in the short term, it easy to see that the stock market might have a ways more to come down based on this alone.

Here’s a good chart of where the stock market was right before the dot com bubble, and where our 2025 market was. Really it looks like the tariffs were the catalyst the market needed for a bit of a correction.

Q1 Just Ended (safely), Q2 Will Hurt:

The earnings part of this ratio is yet to be updated as we await company earnings, since we just closed out Q1, earnings hits won’t show up in financial statements until Q2. It’s 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’s likely going to overshoot to the downside, which is when the buying opportunity should present itself. Only warning I have is 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.

Short-Term 4-Year Plan:

At minimum it will likely be at least 4 years before things change (again, unless Mr. Orange changes his mind). Factoring in a 4 year bleed, I somewhat hesitate to recommend the plan of borrowing money to invest. The state of our economies were already stretched quite thin prior to this, 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 in 2029 everything goes back to pre-tariffs. 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.

Guns and a Foot:

The US will almost certainly see high inflation and job losses due to companies inability to be competitive globally and export at reasonable prices as countries start to put reciprocal tariffs in place. It’s equally 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’s 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 have to balance the possibility of both these things happening. It’s likely this will be long and drawn out, but it is equally likely things will change sooner than later. In either scenario, the US *should* return to a more free 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 doesn’t necessarily matter if you are a long-term investor buying with cash you can afford to dump into the market. This is likely going to be viewed in the future 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 safe haven for capital. The long term impacts on US economic dominance due to this policy, lack of trust with trading partners, 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:

Importantly, to much of the high tech industry. Chips from Taiwan will become more expensive. Ton’s of supply chains are located abroad, especially in China, and lots of consumer electronics are manufactured in Chain or Taiwan. With the additional US tariffs, projected lack of consumer spending, you might see companies like Apple drop significantly (which it has already). I’m not going to be buying individual stocks, but my suspicion is that consumer spending will basically 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 they won’t have 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. I don’t really see a guarantee that things will improve. When we had 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. That being said, every time in history that the US market has fallen, things have eventually recovered. On top of this, there is an limit to the amount of time that Trump will be in office (for now).

US Global Dominance in Question:

The only assumption that hasn’t had to be questioned for the last 80 years, is if the US remains the dominant economic force once all of this is over. They were riding the high of being one of the most innovative and powerful economies in the world. The competitiveness of the US on cutting edge tech, and top talent from across the world being attracted to the economic machine is genuinely put into question thanks to this move. China was already on pace to surpass the US as the largest economy, it’s currently at #2. I suspect this will just accelerate the US decline in 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. There will be people within the country that will continue to be on the cutting edge, entrepreneurialism is still going to be at the heart of the US. They will still export a lot of media to the rest of the western world.

More Room to Fall? China Hits Back:

I think there is still room to fall. 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’m not even sure the tariffs have been priced in yet.

On the “pricing in” tariffs front, today China announced reciprocal tariffs on the US, which caused the already down market to drop even more today. The US imports over $450 Billion of Chinese goods which now have a 34% tariff slapped on them as of this morning. 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 and further drops in the US markets. 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 more and more likely that Trump will backpedal. Even if he does no one will trust his word anymore and the market may just continue its freefall.

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’d be able to pay off successfully should that turn out to be a poor decision. It’s also important to consider your stage in life when deciding how much risk to take. I’m 25, I don’t enjoy taking on huge amounts of risk, but I’m young, so taking on a bit more risk than someone who is retired isn’t a bad move. Regardless, prudence is also important when we’re talking about entire economies getting hurt and people losing jobs. If you’re not in a recession proof job, be careful. I don’t really have all that much to lose right now, but I also don’t want to be an idiot and lose for no reason. So calculated risks are important, and I think this is a good time to take action and calculate some risks.

That’s my analysis of the scenario, 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 it’s 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, timing the market is a fools errand, so just 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, only time will tell. This time, the decision isn’t 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. Beyond that any increase in the share price was “free” appreciation. Just wanted to throw that out there as something to consider, obviously be careful about the industry you choose, but this is just an idea to mitigate risk while increasing your position in the market.