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In my previous article, I gave my broad overview of where I thought the “Trump market” was headed. In this column I’ll outline how I think investors might respond to the coming volatility. The next four years are going to be difficult for investors. Based on what we’ve seen in the weeks since the election, the new Trump administration is going to be the most disruptive we have ever experienced in Washington. Many of the moves won’t directly affect markets, such as the vendetta the President-elect is planning for the Justice Department. But some will spin investors’ heads.
Tax cuts and deregulation will boost stocks, as they did in his first term. Tariffs will dampen the stock markets and overspending will rattle the bond sector, perhaps forcing the Federal Reserve Board to reverse course on interest rates.
All this, plus the certainty of shock announcements from Washington as the year progresses, will rattle an already pricy market. There is a good chance that the result will be a recession in 2025, once the wave of euphoria over tax cuts and deregulation passes.
How should investors respond to this possibility? Here are some suggestions.
No one can predict when the market will top out, but we seem to be getting close. Stock valuations on the S&P 500 are near record levels. Government and consumer debt is uncomfortably high. The probability of extreme volatility as the Trump administration takes over will add to the stress. We’ve had a long, good run. It may not be over, but wise investors will take some of their cash off the table. We’ve recently issued several sell or sell half recommendations in my Internet Wealth Builder newsletter. That’s no accident.
Even with interest rates falling, cash should be a significant portion of your portfolio right now. I suggest a minimum of 10% for aggressive investors and as much as 25% for conservative retirees. You can still find online banks that offer more than 3% on their savings accounts. I also like the high interest ETFs such as the CI High Interest Savings ETF (TSX: CSAV) or the Global X High Interest Savings ETF (TSX: CASH).
Remember the bad old days when the loonie traded at less than 70 cents in U.S. dollar terms? Well, those days are back. Our currency is already at its lowest level in more than four years. If the high tariffs materialize, even temporarily, the loonie almost certainly will hover at the 69 cents range – maybe lower. That means more than expensive U.S. vacations. Prices for all imported items will rise, including food. U.S. dollar accounts don’t pay much interest, but if our dollar fell to US$0.68 from its current level, that alone would give you a gain of 4.6%.
If the market turns bearish, it will drag down almost everything. But high-quality dividend stocks should hold up better than most. They offer dependable cash flow, which should help stabilize their share price, and in most cases dividend increases will continue even in a slow economy. Suggestions include TC Energy Corp. (TSX: TRP), Fortis Inc. (TSX: FTS), and Royal Bank of Canada (TSX: RY).
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.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 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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