November 2024 LifeSpring Insights

November 5 is Election Day in the United States and all signs point to a close race – possibly one that may not clearly be decided right away. It’s bound to be a nail biter with the whole world watching in anticipation of the result.

When it comes to how the election impacts things here in Canada, it’s safe to say our biggest economic concern hinges on trade. With good reason: The US accounts for around 76% of Canadian goods exports, according to the latest data from Trading Economics. Close to home here on the West Coast, about 57% of BC’s exports go to the US, according to data from the Library of Parliament. Trade with the US is paramount to Canada’s economic vitality.

There’s also the stock-market side of things: The TSX Composite Index and S&P 500 have hit all-time highs this year, so it’s fair to wonder if election tension could cause a pullback.

Before going further, if you’re concerned about your investments, now is a good time to speak to your advisor and make sure you have a plan in place to suit your goals and risk tolerance. This is the optimal thing you can do to maintain peace of mind and prepare yourself and your finances for the future.

Much can happen between now and Inauguration Day in January 2025. But history and current market trends can help you make informed decisions to determine your strategy.

Delayed – or contested – election results are the biggest short-term risk

Of course, markets dislike uncertainty, so the biggest short-term risk is if it takes a while to determine the election winner – or if tensions in the US escalate post election. Note that we’re talking about short term here. If you’re invested in equities, it’s best to do so for the long-term. With that in mind, there’s better news: History tells us that when uncertainty is removed (and eventually the 2024 election will be decided and we’ll all move on from it), market gains are likely.

We’ve seen this many times over the course of history. The most recent being when markets recovered after the initial COVID-driven crash of March 2020.

Central banks have more influence over markets than governments

History also tells us that over time, presidential elections have minimal effect on stocks. For example, according to recent data from Bloomberg and TD Economics using returns from 1946 to 2024, the S&P 500 gained a little over 10% in the first year after the election when a Democrat won the presidency and a little more than 6% when Republicans won.

The S&P 500 also gained, to varying degrees, whether one party swept the presidency, the Senate and the House of Representatives or in a divided government. Again, this makes sense, as divided government forces the parties to compromise on some of their more controversial positions. That, too, can provide a bit more certainty for markets.

Something else to bear in mind is that when it comes to the direction of the US stock market, the Federal Reserve’s interest-rate decisions tend to carry more weight than government policy. Stock-market declines as the central bank hiked rates in 2022 and into 2023 are an example, as are gains in 2023 and 2024, as central banks shifted to rate cuts.

But this doesn’t mean the government has no role at all. The fact is, the US is running a $1.8-trillion deficit for 2024, according to the U.S. Department of the Treasury. Neither party has shown interest in tackling that deficit, so we can expect that extra spending to keep supporting the US economy. It also puts upward pressure on asset prices – including stocks and real estate.

What about those tariffs?

To be sure, higher tariffs, such as the 10% to 20% tariffs on all US imports proposed by Republican nominee Donald Trump, would be a drag on Canadian exports. They would also increase the cost of living in the US and Canada, as Canada would almost certainly impose retaliatory tariffs, as it did during Trump’s first term.

There’s another factor to consider here, however: the fact that tariffs on Canadian exports would likely cause a decline in the Canadian dollar. In that case, Canadian goods could still be competitive in the US if the currency’s decline offsets all or most of the tariff.

Of course, there’s no single solution answer, since a lower loonie would raise the cost of goods Canada imports from the US, potentially adding to inflation here.

US/China trade spat could improve Canada’s trade position

Staying with trade, another potential trouble spot for Canada is the renegotiation of the “new NAFTA,” or as it’s known in this country, CUSMA, or the Canada-US-Mexico-Agreement, which came into force on July 1, 2020. Under the deal, the three countries must review the deal every six years, with the first review slated for 2026.

To be sure, this discussion will be contentious, no matter who wins the election. There are current and ongoing trade disputes over issues such as dairy, Canada’s recently enacted digital services tax and country-of-origin rules in the auto sector. But it is safe to say that a Trump administration would be more aggressive than an administration under Democratic nominee Kamala Harris.

Beyond CUSMA, Trump has also argued for higher tariffs – perhaps as high as 60% or more – on all US imports from China. That would make everyday essentials more expensive for American consumers, potentially stoking inflation. This could impact Canadians indirectly, but also directly in sectors such as tourism – cross-border leisure travel into Canada could decrease as Americans stay home in order to save money.

However, new US tariffs on Chinese imports could, in a roundabout way, make trade talks a little easier for Canada (and Mexico). That’s because the US would likely not want to boost inflation with high tariffs on its neighbours – and two largest trading partners – at the same time as it does so with China. 

Finally, here’s how BC could be affected

BC has a vast resource sector, much of it reliant on trade with the US. As with the rest of Canada’s exports, BC’s resources would be less attractive in the US if they face higher tariffs and the Canadian dollar holds steady.

However, there are cases where the US simply doesn’t produce enough of a particular resource on its own and has no choice but to buy from Canada. Lumber is one of those, and it’s directly tied to US homebuilding. Both Harris and Trump support speeding up homebuilding in US, which would be good for lumber demand.

So unless tariffs are so high they make houses unaffordable – unlikely, given the US also suffers from a housing shortage – the tariff’s effect on the lumber industry may be muted.

There is one other potential side benefit for BC that’s worth mentioning: If higher tariffs result in a lower loonie, tourist areas in BC, such as Whistler and Kelowna and Vancouver, could benefit as more Americans visit, looking to take advantage of their stronger currency.

Your advisor can help you stay on track with your goals

While no one knows for sure what the next few weeks will bring for the Canadian and US economies, the long-term direction of stock markets is up over the long term, so it’s best to stick with your plan and remain invested for the long haul. Whatever your financial concerns or objectives, now is a good time to speak with your advisor to make sure you’re as well-positioned as possible for the future. Get in touch today.