The S&P/TSX Composite Index might be up this Friday, but more volatility lies ahead for Canadian stocks.
Market-moving headlines in the United States like the U.S. trade war with China largely influence the TSX. Investors have yet to appropriately react to the news that the World Trade Organization (WTO) has approved China to impose retaliatory sanctions against the United States.
Next week, the market may move lower as the trade war between Asia and North America continues. The WTO permitted China to impose $3.6 billion in sanctions against the U.S. in retaliation for contentious calculations of anti-dumping tariffs.
The U.S. assigns a value of zero to export prices that are higher than domestic prices in China. This methodology biases the tariffs to the benefit of the U.S. and the detriment of China. The Trump administration’s protectionist trade policies may be a separate issue, but it is undoubtedly related and creates new disputes within the global legal system overseen by the WTO.
Canadian investors should understand the role the WTO plays in international trade and how this decision impacts their portfolios.
History of the WTO
After World War II, major world powers created the General Agreement on Tariffs and Trade to avoid trade-related military conflicts. In 1995, 123 nations replaced the GATT with the WTO.
The agreement aimed to advance multilateral trade and discourage protectionist trade policies, which tend to distort private economic incentives and external comparative economic advantages.
The first rule of the WTO is the most-favoured-nation principle. Members of the WTO agreed not to give any other members better trade terms than another country. All trading partners must be treated similarly to the others.
The second rule of the WTO is to treat imports and exports equally after goods enter the country. Customs duties do not violate this “national treatment” clause of the WTO agreement. In essence, legal regulations involving foreign and domestic services and trademarks should not disadvantage imports.
Effect on the TSX Composite Index
The TSX Composite Index has typically reacted in the same direction as the U.S. stock market during the trade war volatility if not with the same magnitude. Today, for example, the U.S. S&P 500 Index climbed by 0.81%, or US$24.38, while the TSX gained a more modest 0.38%, or CAD$62.02.
Being the Friday after Halloween, with a still uncertain Brexit outcome, traders are probably waiting for additional market signals before reacting to the WTO trade dispute resolution.
Canadian savers should not have much to fear. Despite the day-to-day volatility of the index, the TSX Composite remains up for the year by around 10%. The market index is still a great way to avoid the hassle of trying to distinguish between winners and losers on the TSX, even with the brewing trade war tensions.
Foolish takeaway
Aspiring Canadian retirees should try to find safe places to park their retirement funds to “invest and forget.” Long-term investing is the key to success in a volatile market. When the market is down, even due to trade war uncertainty, Canadians should be picking up shares in the TSX Composite Index, banking, telecommunications, and insurance stocks.
These are the safest and smartest purchases a Canadian can make with their hard-earned income.
