Market Factors: A deeper dive into how TSX investors are trading the tariff war

After three tiresome months of threats, deadlines, ultimatums and pauses, the opening salvos in the great North American trade war have finally been lobbed. This is investment reporter Tim Shufelt, and today we’re talking about – what else? – tariffs, Trump and trade. Our focus will be on how the stock market has attempted to process the bewildering breakdown of the system of free trade that forms one of the pillars of the Canadian economy. We’ll also look at how European defence stocks have bolted skyward since the U.S. suspended aid to Ukraine. And we’ll touch on the trade war relief plans being readied by Canadian governments.

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TARIFFS

‘A little disturbance’

Donald Trump may have underplayed the economic toll of his tariff war just a smidge in the process of making America great again. “A little disturbance,” as he characterized it in his speech to Congress on Tuesday night. This contrasts with the rising risk of a U.S. recession, sharply increasing inflation expectations, shaken consumer confidence and American job losses coming into view in vulnerable industries.

And yet, Trump was sort of right from the perspective of the stock market. Sure, things have been volatile. But hardly proportional to the world-changing geopolitical upheavals that are afoot. The S&P 500 index is just 4.9 per cent off the record high it notched two weeks ago. And in the two trading days since 25-per-cent tariffs on Canada and Mexico have been in place, the U.S. benchmark is pretty much flat.

Curiouser still, the TSX has held up just as well. It’s down by 3.6 per cent from its year-to-date high, while shedding only 0.5 per cent over the last two days.

To get to where the real action is, you need to go beneath the surface, where fortunes are shifting – part of a mass recalibration of winners and losers in a hostile, protectionist era. Let’s dive in.

Canadian stocks

Investors have had three months to wrap their heads around the contours of a trade war and its toll on domestic companies. Of course, there is more than just trade friction behind the ups and downs of Canadian stocks in that time, but some tariff-related themes certainly jump out.

• Auto parts

This one’s a no-brainer. There’s no industry more continentally integrated, with parts zig-zagging across borders multiple times before final assembly. Tariffs could effectively break the industry’s supply chain, which is why the losses have been so severe in these names. On average, the three Canadian auto parts stocks – Magna International Inc., Linamar Corp., and Martinrea International Inc. – are down by about 20 per cent in the last three months or so. And that’s after a one-month tariff reprieve for the sector announced by the Trump administration on Wednesday pared the losses.

• Oil and gas

Canadian oil essentially has one market. After meeting domestic refining needs, 98 per cent of our crude is exported to the U.S., according to the Canadian Association of Petroleum Producers. So, even at reduced tariff rate of 10 per cent, these stocks are exposed. Since last November, the sector is down by about 15 per cent. And over the past few trading days, big names in oil and gas have been hit hard. Shares in both Cenovus Energy Inc. and Suncor Energy Inc. have lost about 11 per cent over that time.

The tech sector has been the focus of the recent selloff globally, with the Nasdaq Composite Index dipping briefly in correction territory on Tuesday. The TSX doesn’t have a ton of tech exposure, but what is there has been smoked this week. Shopify Inc. is down by 6 per cent, while Celestica Inc. has lost 16 per cent.

• What’s worked

Gold. That’s pretty much it. Gold prices are up by around 35 per cent in the past year. Plus, Canadian gold producers get the added benefit of a cheap loonie, since they typically sell what they produce in U.S. dollars but pay costs in Canadian dollars. Since late November, gold stocks account for 11 of the top 15 performers in the S&P/TSX Composite Index.

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DEFENCE STOCKS

The rearmament of Europe

The stock market has a twisted sense of humour. After last Friday’s debacle in the Oval Office stunned the world, investors wondered, “Where’s the upside?” The answer: European defence companies.

When Ukraine’s president was berated on national television for not saying “thank you” enough, after which the U.S. cut off military support for the resistance against the Russian invasion, the financial burden for the war quickly shifted to Europe.

This chain of events confirmed that a cycle of heightened military spending in Europe is “for real,” according to a note by JPMorgan Chase analysts, who hiked their price targets for the group of stocks by an average of 25 per cent.

“The events of the last two weeks have turbo-charged this thesis,” the analysts wrote.

The beneficiaries include German arms manufacturer Rheinmetall AG, British defence contractor BAE Systems Plc, and Swedish aerospace and defence company Saab AB. All three are up by 15 to 20 per cent this week alone.

NON-DIVERSIONS

Pandemic-style stimulus in the works

While this space is normally reserved for something off-beat, this is no time for frivolous distractions. We’re at (trade) war, people!

Since Canada has found itself in Trump’s crosshairs for reasons that remain largely unknown, governments have been contemplating supports for Canadian households and businesses impacted by a trade war.

To cushion the blow of lost jobs, which Immigration Minister Marc Miller suggested on Monday could ultimately number one million, economists are calling on Ottawa for immediate reforms to employment insurance system.

But policymakers would be wise to heed the lessons learned from the pandemic when it comes to emergency stimulus, Claude Lavoie writes.

The essentials

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Globe Investor highlights

The trade war, a proposed $1.2 trillion European fiscal bazooka and the emergence of China as tech race leader are upending global flows of money, marking a potential turning point for investor capital away from the United States.

Why this week’s steep U.S. dollar plunge may be more remarkable than it appears on first glance.

Investors are weighing whether Donald Trump might turn to unconventional ideas to try to bring the ballooning U.S. debt under control.

What’s up next

Friday will bring the release of February job numbers for both Canada and the U.S. – and the monthly numbers will be particularly interesting this time around. Private sector numbers from ADP came in much weaker than expected on Wednesday, suggesting this could be yet another U.S. economic print that leaves investors feeling queasy. Meanwhile, a soft Canadian number could seal the deal on another interest rate cut by the Bank of Canada at its next policy meeting next week.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)