Tariffs and the TSX

Is it time to reduce risk and lighten up on Canadian equities?

Despite all the concern about Donald Trump’s tariff threats, the TSX has been holding up remarkably well so far this year.

The Composite is ahead 3% year-to-date (to Jan. 31). The major U.S. indexes are doing better, but the fact Toronto is in plus territory in the face of Trump’s tariff threats is encouraging.

But it must be noted that most of the big winners are natural resource stocks, which may end up being exempt from tariffs. The Global Gold sub-index is ahead 11.79% for the year, making it the best performer by a wide margin. Other strong sectors include materials (+8.46%) and energy (+3.2%). All but five of the sub-indexes are in the black. That includes industrials (+3.6%), which would seem to be the sector most at risk from a tariff war.

Despite the positive results so far, many people are still nervous about what lies ahead for Canadian stocks. One reader, Taylor M., wrote as follows:

“I read your comments that if Trump does put tariffs of 25% on Canadian products, the Canadian market will get hit very hard. Could you explain this a little? Will this effect all Canadian stocks? I would hate to have this over our heads for the next four years.

“I own quite a few Canadian dividend stocks such as banks, telecoms, pipelines, and utilities. Will these be affected in your opinion?”.

The answer is probably. A report issued recently by CIBC said that with a 20% tariff that excluded commodities such as oil, Canada’s GDP would take a hit of 3.25%. A more moderate tariff of 10%, again excluding commodities, would depress GDP by 1.35%.

Remember that Mr. Trump’s threat is a 25% tariff across the board. The CIBC analysis stops short of that extreme.

Given Canada’s current growth rate, the 20% scenario would plunge us into a recession. The 10% alternative would cut Canada’s GDP growth rate to almost zero. Either would have a negative impact on the TSX.

There are several ways in which the Bank of Canada and the federal and provincial governments could attempt to mitigate the tariff impact on the economy. The central bank could, and probably will, aggressively cut interest rates to reduce the cost of borrowing and encourage business investments. Governments could inject massive amounts of money into the economy, as they did during the pandemic, to stimulate businesses and encourage consumers to buy. Ontario Premier Doug Ford is calling a provincial election to win a mandate for this strategy.

Tax cuts to encourage business investment are another possibility. Liberal leadership candidate Chrystia Freeland has already withdrawn her support from the bill to increase the capital gains inclusion rate, which she originally sponsored when she was Finance Minister.

There is no way of knowing at this point how effective these measures would be, alone or in combination. But they show that Canada is not helpless if the tariffs come.

Blue chip dividend stocks like Enbridge Inc. (TSX: ENB), Fortis Inc. (TSX: FTS), and the banks don’t appear to have much tariff exposure and would receive a boost from deeper rate cuts. But all this will take time to play out. If U.S. tariffs push Canada into a recession, even for a short time, the whole market is likely to slump. That includes blue chip issues. They may be hit less hard, but they won’t escape the downward trend completely.

This is not to suggest that our reader sell all his equities. Bad times eventually pass, and history shows that markets always recover.

But I suggest two moves for anyone who wants to reduce risk,

First, if you’re overweight in Canadian stocks, reduce your holdings and use the money to buy some U.S. blue chips. Companies to consider include Procter & Gamble Co. (NYSE: PG), Goldman Sachs Group Inc. (NYSE: GS), Microsoft Corp. (NSD: MSFT), and Walmart Inc. (NYSE: WMT).

Second, buy some low-risk US T-bill ETFs, which will provide protection against a falling loonie. I like the iShares 0-5 Years TIPS Bond Index ETF C$ (TSX: XSTP), which is solid and safe. Just don’t expect a repeat of the 14.11% return in 2024.

These two moves will bolster your return potential while adding an ultra-safe fixed income ETF to your portfolio.

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 © 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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