How investors can avoid being ‘Trumped’ by tariffs and frothy markets

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On a vacation last winter in Costa Rica I found myself caught in a large rip tide. Every instinct in my body wanted me to fight the current, but once I was able to overcome the fear that I could not defeat such a powerful force, logic kicked in and I remembered to swim parallel to the shore. I relaxed, did this calmly and the next thing you know I was quickly out of trouble.

I strongly believe this is the same approach Canadians need to take when dealing with United States President Donald Trump’s protectionist threats, including tariffs and economic force, against our country. Our politicians have to resist the urge to react against someone we simply cannot win against and instead look for a safe way out of trouble by remaining calm and calculating.

My daily living motto involves constantly reminding myself that outside of health and tragic events, most things happen FOR you, not TO you. When trouble hits we can go to the default 1) poor me or 2) blame them, or we can be brave enough to move immediately to 3) what am I going to do about it?

I firmly believe, as painful as it sounds and is, that Trump’s move against Canada is a “for us, not to us” moment. This doesn’t mean we shouldn’t respond but do so in a well thought-out manner that involves playing the long game, such as making immediate preparations so that this never happens again.

Perhaps this wouldn’t have occurred to the same extent if we had a means to export our four million barrels per day to other markets instead of just the United States. Maybe now the country can be united in building out its energy and resource infrastructure to grow and diversify our portfolio.

The same exercise should be done with managing our investment portfolios, as we have also become over-reliant on U.S. stock markets. These, to me, are looking a little long in the tooth with record setting valuations no longer backstopped by fundamentals and facing some serious threats from the Trump administration’s actions.

Take a look at Apple Inc. Its revenue growth has been fairly flat since September 2021 and yet its share price is up just over 60 per cent. As a result, it is trading at all-time highs representing nearly 10 times sales and 40 times earnings. The company also has 56 per cent of its sales coming from outside the U.S.

Take a look at Telsa Inc. Its share price gained 63 per cent in 2024 and its revenue only grew one per cent. It also derives 61 per cent of its total sales outside of the U.S.

I really do worry that the U.S. market has the potential to be what I call “Trumped,” with global tariffs having the potential to be a black swan event. I am not alone, as David Rosenberg recently posted:

“It is interesting to look at U.S. equity futures and see that the launching of this trade war is so far being treated no differently than the initial reaction to DeepSeek. The lack of panic tells me that investors expect this tariff file to be resolved quickly. Room here for disappointment when you look at the real reason for the trade action – to defray the cost of the Trump tax-cut agenda.”

Many market participants just look to buy the dip, especially in U.S. technology stocks. But this has the potential to be a material change in the global economy of which the U.S. is a large part. Trump has now thrown a giant wrench into the cogs of international trade and commerce and the longer it stays in, the greater the chance something will break. This is a scenario few market participants are considering.

My word of advice is to remember that the stock market is not the economy. Canada’s economy may very well underperform the U.S. this year but our stock market may do considerably better, given the large valuation gap and the types of companies listed. Ironically, it may also be an excellent way to hedge your portfolio.

For example, we have been adding to our U.S. dollar exposure for our clients all the way up to last weekend but as our loonie continues to sell off we may calmly swim parallel to the shore and convert some back into Canadian dollars for a hefty profit. OPEC is recently standing firm with supporting oil prices, which will provide a floor to our dollar and importantly allow the Bank of Canada to cut rates at a faster pace than the U.S. Federal Reserve.

We also recently bought insurance (via at-the-money put purchases) on our entire Russell 2000 exposure, providing full downside protection against any correction until this November. Because of the level of complacency and overall bullishness in U.S. markets, we were able to sell out-of-the-money calls completely offsetting the cost of the insurance we purchased. This means in a worst-case scenario we will break even on the trade with a bit of dividend income, and in the best case make a capped 15 per cent total return.

Our previous calls written on the tech-heavy S&P 500 meant we sold at a large gain on our position and reinvested it into the Vanguard Value ETF (VTV) due to the lower risk components, such as Berkshire Hathaway Inc., JPMorgan Chase & Co., Broadcom Inc., Exxon Mobil Corp., and UnitedHealth Group Inc. So far this trade has yielded nearly two times the return of the S&P 500, and didn’t sell off nearly as much on the U.S. announcing tariffs.

We then shored up cash, which we view as a put option without expiry, choosing not to immediately reinvest structured notes that were also called away and sold. We now have the option of redeploying but taking our time putting together a shopping list as this market corrects. The good thing with this expanded volatility is we are starting to see some very attractive notes being issued.

In conclusion, remember that times like these are when opportunities arise out of change and chaos. Lao Tzu, author of the Tao Te-Ching, couldn’t put it better when he said, “Knowing others is intelligence; knowing yourself is true wisdom. Mastering others is strength; mastering yourself is true power.”

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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