President Donald Trump’s tariff hike (to 35% from 25%) on Canadian goods entering the U.S. is in the books. And while the 10% hike may be ringing alarm bells in the ears of some investors, you really wouldn’t know it by looking at the TSX Index, which is just a percentage point away from hitting new all-time highs. Undoubtedly, there’s a sense of optimism that a deal can get done, even if it means having to endure another couple of months of this trade war. Indeed, the stock market is forward-looking, and it’s looking forward to any sort of progress on trade as we head into the fourth quarter of the year.
Undoubtedly, higher tariffs could take a big bite out of Canada’s economic growth. That said, don’t expect any sort of long-lived recession to hit anytime soon, especially if the U.S. Federal Reserve follows in the Bank of Canada’s footsteps by slashing interest rates, something that President Trump has wanted for quite some time now.
While I don’t think it’s a good idea to discount the impact of Trump’s new tariffs or assume that a deal will work out before the real pain starts to be felt, I do think that it makes sense to play the long-term game.
Indeed, the post-Liberation Day sell-off was driven by sheer fear. And while things haven’t gotten much better regarding trade relations between Canada and the U.S., I do think that there’s ample value to be had in corners of the market that may not be hit as hard as expected by higher tariffs. Indeed, even the firms exposed to higher tariffs have had ample opportunity to shift gears and prepare for the storm.
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Don’t let tariffs derail your game plan!
The big question for investors is whether they’ll be in a good spot to ride out the storm or if climbing tariffs are a sign of worse things to come. Either way, I do think that many TSX stocks have a “tariff discount” slapped on them. And once a trade deal is inked (I have no idea when this will happen), such a discount could come off quickly. Whether that entails a huge single-day gain or a sustained rally towards higher levels over a span of weeks or months remains to be seen.
Either way, I think that long-term investors with a time horizon beyond four years can feel better about the prospects of a trade deal. In the short term, 35% tariffs are a thorn in the side of economic growth. But just how long will that thorn stay there? That’s the big question. For long-term thinkers, I think it’s more about sticking with the businesses poised to thrive, regardless of whether trade relations can be healed this year.
CN Rail stock: A wide-moat for a wide discount
For Canadian investors, it’s more about staying the course, rather than trading in response to rising tariffs. Personally, I think a fallen transport stock, like CN Rail (TSX: CNR), looks like an absolute market bargain. I believe there’s a sizeable tariff discount on the stock, which may be overdone.
At $127 and change per share, the stock goes for 17.5 times trailing price-to-earnings (P/E), the cheapest I’ve seen the stock in a while. The 2.8% dividend yield is also intriguing, but do be careful when catching the falling knife. Personally, I think the post-quarter bust could bring forth some change in upper management, something I noted in a prior piece. Could such a change bring forth upside? Perhaps. But one thing is clear: CNR shares are on a downhill track. A trade deal would certainly be nice to have.
