A flock of black swans?

How Trump’s unpredictability could impact markets

All things being equal, 2025 should be shaping up as a good year for the Canadian economy in general and the TSX in particular.

Interest rates are down and are poised to fall even further. Inflation appears to have been tamed, at least for now. The economy may be sluggish but seemed to be headed for a soft landing.

At least it was until U.S. President Donald Trump announced his intention to slap a 25% tariff on all imports from Canada and Mexico (a plan that was recently paused for 30 days).

Ostensibly, the tariffs are in direct response to migrants and drugs pouring into the U.S. Trump said they will remain in place until both countries tighten up the borders. Until then, Canada and Mexico will “pay a very big price!”

The policy is absurd on many levels. To equate the Canadian and Mexican borders in terms of porousness is bizarre. To suggest only Canada and Mexico, but not the U.S., will pay a price is disingenuous – the U.S. economy will also take a big hit.

Moreover, it now appears that whatever we do about the border will not be enough. Trump has since claimed that the U.S. is “subsidizing” Canada to the tune of $100 billion a year. It’s unclear where that number comes from, and it may not matter. With his subsequent comments about Greenland and the Panama Canal, Trump seems to be setting the stage for an expansionist foreign policy aimed at unifying the North American continent north of Mexico under the American flag and regaining control of the Canal Zone.

For different reasons, Trump is also seen as a threat to U.S. stock markets this year because of the uncertainty he brings to the Oval Office. Investors like his tax reduction and regulation slashing policies. They don’t like his tariff plans, which could raise U.S. prices on everything from oil to clothing, while squeezing profit margins for a wide range of companies.

All this makes predicting what will happen this year extremely difficult. Trump is more than a wild card. He’s like a flock of black swans descending all at once.

Let’s start with an assumption. Trump will go ahead with his announced tariff plan. That will have a modest negative impact on U.S. stocks. The TSX, by contrast, will probably get hammered, if it hasn’t already fallen enough to offset the blow.

The longer the tariffs remain in place, even with carve-outs for oil and certain rare minerals, the greater the pressure on Canadian stocks. Even the banks, which at first glance would seem to have little exposure to tariffs, will be affected by a slowing economy. Many economists have said that the result will be a Canadian recession by mid-year. And it could drag on if Trump’s real motive is to tighten the screws is an effort to force Canada to meet his demands – whatever those may be.

Based on these assumptions, here’s what could happen in 2025.

A down year for the TSX. We could be looking at a worse loss than in 2018, when the Composite fell 11.64%. If the tariffs remain in place for the full year and Trump’s rhetoric continues to threaten Canada, we could approach the loss of 35% incurred during the Financial Crisis year of 2008. That’s a worst-case scenario, but it’s not outside the realm of possibility.

U.S. stocks will do better by comparison. The U.S. markets were winners during Trump’s first term, and there is a lot in his policy platform that investors still like. I don’t expect returns on the order of those we saw in 2024, but a gain of 10%+ on the S&P 500 would not be a surprise.

Offshore markets will suffer. Trump’s America-first policies will spark trade wars that will hurt all involved. Europe is especially vulnerable and already the once-powerful German auto industry is showing cracks. China is being targeted with outsize U.S. tariffs, and its economy is already struggling. Emerging markets should be avoided.

Bonds will rally. I sound like a broken record on this one, but the conditions suggest bonds will do better this year. Interest rates will fall as the economy feels the tariff impact, and long-term bonds should be generate the largest price gains.

Cash will pay less. As we saw last year, falling interest rates knocked back yields on GICs, high-interest ETFs, and similar securities. Look for more of the same this year.

Our dollar will continue to fall. The combination of U.S. tariffs and easing by the Bank of Canada will continue to put downward pressure on the loonie. In January 2002, our dollar hit its all-time low of 61.79 cents versus the U.S. dollar. If worse comes to worst, we could test that level this year.

This is a bleak scenario, and I hope it doesn’t come to pass. But I don’t like the vibes Trump is giving off. He is emboldened, determined, has a compliant Congress, and has a strong mandate to do whatever he wants.

To sum up, your plan for 2025 should be to lighten your Canadian stocks, add to U.S. equity positions, increase your weighting in long-term bonds, and keep at least a portion of your cash in U.S. dollars.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2025 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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