Stock market sectors hit hardest by the US-Canada trade war

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Technology, financial and energy companies took the biggest hits on Canada’s main stock index Tuesday after United States tariffs on Canadian imports went into force at midnight.

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The S&P/TSX Composite Index closed Tuesday down more than 400 points or 1.7 per cent on Tuesday, extending a Monday decline of 1.5 per cent that was triggered late in the session when U.S. President Donald Trump told reporters there was “no room left” for negotiations and confirmed the tariffs would go forward.

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In the U.S., the S&P 500, Nasdaq Composite and Dow Jones Industrial Average all saw losses deepen on Tuesday, with financials, consumer staples and industrials leading the S&P’s decline.

The reaction signals “a very clear risk-off approach to markets,” said Josh Sheluk, chief investment officer and portfolio manager at Verecan Capital Management.

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Financial companies in Canada and the U.S. took a larger than expected hit on Tuesday, a sign that Sheluk said shows the market is concerned about economic growth in general, and less so with the impact of tariffs on particular sectors.

“With them selling off so much today, I think what you’re seeing is the second-order effect playing at the top of people’s minds,” said Sheluk. “Tariffs are, I’d say, unequivocally negative for economic growth, and negative for economic growth means almost necessarily negative for banks and lending institutions.”

While stock indices experienced broad-based losses, a few sectors came out relatively unharmed, such as utilities, gold and real estate.

Sheluk said that could have less to do with tariffs, and more to do with them being favourable in a risk-off environment.

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While sectors like energy, automotive, manufacturing and potash have more U.S. exposure, they’re also vital to the U.S. and can’t be cut off cold turkey, said Greg Taylor, chief investment officer at Purpose Investments.

If the market gets too oversold, where does he turn tail and start to backtrack on some of his threats?

Josh Sheluk

Taylor pointed out that most of the Midwestern U.S. is powered by Canadian energy — one of the reasons why the tariffs may be short lived.

“When you look at energy, you look at uranium, you look at potash, when you look at the auto sectors, these sectors are so important to the Americans and also to Trump’s investor base that I just don’t see them lasting that long,” he said.

Taylor said the markets will test Trump, with many debating when the “Trump put” will kick in if the market declines too much.

“If the market gets too oversold, where does he turn tail and start to backtrack on some of his threats?”

If there’s a silver lining, Taylor said it’s that market volatility has caused a rotation away from growth sectors toward value and defensive sectors.

“The TSX is definitely more heavily skewed to that factor. We’re seeing some pockets of life in some of these areas that haven’t done well over the last year,” he said. “It’s probably a positive to get that rotation going and some of these defensive, some of these utilities are starting to benefit from this more volatile environment.”

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While there’s always volatility in the stock market, Sheluk said investors can expect “choppiness” and “elevated volatility” as the trade war unfolds, depending on the magnitude of tariffs, which countries they’re directed at and how long they stay in place.

But both Sheluk and Taylor said investors should avoid letting fear, panic and daily headlines motivate investment decisions. Instead, they recommend staying patient and sticking to a long-term plan.

“What I try to remind investors is a lot of this is potentially short term and, as I’ve highlighted multiple times, very unpredictable,” said Sheluk. “Trying to guess and time things and position portfolios accordingly is maybe not the best course of action right now. It might just be better to stay diversified, stay balanced and sit back and let things play out a little bit.”

• Email: jswitzer@postmedia.com

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