How the Next U.S. President Could Impact Canadian Investors

For better or worse, the spotlight on the U.S. election shines brighter with each passing day.

As our focus shifts more toward what could happen at the conclusion of the election cycle, Canadian portfolios will surely be impacted. My conversations with advisors are becoming increasingly tactical, as they try to forecast how each potential winner could impact markets. This is complicated by the fact that the macro environment is especially dynamic right now.

While inflation is under 3%, it is still slowly reaching the desired target. The Bank of Canada had its 3rd rate cut, dropping the key interest rate to 4.25%. The Fed is posturing for rate cuts in September, and the downside of this effort could be as unprecedented and unpredictable as the upside. U.S. growth is slowing while unemployment has risen to 4.1%. And we haven’t even talked about what some are calling the most important election in modern American history.

With November rapidly approaching, the U.S. presidency is about to change hands, and this is a reality that Canadian investors and advisors should prepare for. So, let’s think through what both a Harris and a Trump presidency could mean for Canadians investing in U.S. markets.

A Harris Presidency:

A Harris presidency comes with a lot of ambiguity. Will her administration look like a continuation of the previous one? Or will she try to woo undecided voters by introducing new ideas while distancing herself from Biden’s platform? While there are a lot of questions still in the air, there are a few things we know for sure.

Harris will prioritize tax hikes for corporations. This could erode corporate profitability, having a negative impact on the markets and the economy – both short-term and long-term. As a climate champion, she could be bad for big oil on both sides of the border, but good for sectors that prioritize green friendly energy and infrastructure. Plus, as a former California senator, she has deep ties and well-established relationships with big tech, which may lead to friendlier policies for the sector. We also know that she will prioritize healthcare expansion with policies to grow Medicare to all Americans.

A Trump Presidency:

Warranted or not, Trump is commonly perceived as a pro-market president. With proposed tax policies to reduce both corporate and individual tax rates, his office could stimulate the U.S. economy by increasing corporate profits and putting more spending money in the pockets of consumers. He's also focused on deregulating heavily regulated sectors such as energy, healthcare, and finance, leading to larger investment in companies within those sectors. This includes a vow to reinstate the Keystone XL Pipeline project, which would be a bonus for Canada’s energy sector.

Based on his campaign platform, we know that a second presidency would be more protectionist than the first. The results of this could be mixed, with the potential for reciprocation from other countries. This could lead to protracted trade disputes while negatively affecting the global supply chain. For Canadians, the elephant in the room is his proposed 10% tariff on all U.S. imports, which would be a difficult development for a weakening economy that ships nearly three quarters of its exports south of the border.

What Does This Mean for Canadian Investors?

Okay – so we’ve established that both candidates come with a unique set of push-and-pull dynamics. Beyond that, each candidate’s ability to implement their platforms will depend greatly on how divided the U.S. congressional house is post-election. But what we know for sure is that the market is flooded with uncertainty. And that means investors need to prepare for near-term volatility. That’s why I believe that having a high-quality overlay in your U.S. exposure will be important.

FLUS - our U.S. Multi Factor ETF – leans primarily into quality (1) with exposure to value (2)  and momentum (3) layered on top. The quality factor is the foundation that supports the more growth-oriented factor exposures, giving investors a best of both worlds approach, all for 25bps. And despite the elevated volatility this year, FLUS has outperformed the S&P 500 on a year-to-date, 1-year, and 3-year basis.

Source: Morningstar Research Inc., as of August 31, 2024. Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses, and other factors. Indicated rates of return are historical annual compounded total returns for the period indicated, including changes in unit value and reinvestment distributions, and do not take into account any charges or income taxes payable by any security holder that would have reduced returns. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. ETF units may be bought or sold throughout the day at their market price on the exchange on which they are listed.

To be clear, while this moment will be impactful to Canadian investors, the significance of any one election shouldn’t be overstated. But, when you layer in all of the other market dynamics at play, the sum of the parts suggests that we’re in a complicated phase of the cycle.  And, when things get complicated, sometimes keeping it simple with quality is the best approach.

1. Stocks of companies with strong balance sheets, stable earnings, and consistent growth. 2. Stocks of companies trading at lower multiples relative to their fundamental value. 3. Stocks which have recently outperformed on a relative basis over a 1-year period or less.

IMPORTANT LEGAL INFORMATION

Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinion, and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy. All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.

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