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This week has truly been one for the history books. President Trump started his long-threatened tariff war on Tuesday, implementing 25% across-the-board tariffs on all goods coming from Canada and Mexico.
Those countries responded by slapping retaliatory tariffs on US goods, promising to bring all 3 countries into recession while spiking inflation, a miserable combination known as “Stagflation” that we haven’t seen since the Great Depression of 1929.
Canadian Prime Minister Justin Trudeau said his country would plaster tariffs on over $100 billion (U.S. dollars) of American goods over the course of 21 days.
“Today the United States launched a trade war against Canada, their closest partner and ally, their closest friend. At the same time, they are talking about working positively with Russia, appeasing Vladimir Putin, a lying, murderous dictator. Make that make sense,” Trudeau said.
Trump’s trade war draws swift retaliation with new tariffs from Mexico, Canada and China, AP
This trade war isn’t just a terrible idea because Canada, Mexico and the US have historically been allies. It’s not even just a terrible idea because we have a free trade agreement between all 3 countries that Trump himself negotiated during his first term. This trade war is a terrible idea because all 3 of our economies are so tightly integrated that you can’t damage one economy without damaging all 3.
Which is why a day after firing the first shot in this trade war, Trump was forced to delay them on the auto industry, granting a 30-day reprieve to cars. Then the tariff on Canadian potash, which is a critical fertilizer that the US agricultural industry is dependent on, was reduced to 10%. And then the entire tariff increase was scrapped altogether on Thursday for another 30 days.
President Donald Trump on Thursday postponed 25% tariffs on many imports from Mexico and some imports from Canada for a month amid widespread fears of the economic fallout from a broader trade war.
Trump changes course and delays some tariffs on Mexico and Canada, AP
All this has predictably caused stock market chaos as traders struggled to parse the head-spinning whiplash of this White House’s constantly changing and contradictory actions.
The rocky week on Wall Street continued on Thursday as investors grappled with further uncertainty from President Donald Trump’s tariffs.
US stocks opened sharply lower but fluctuated on the mixed messaging coming from the White House. All three major indexes closed lower, despite Trump announcing a nearly one-month tariff delay on all products from Mexico and Canada that are covered by the USMCA free trade treaty.
US stocks slide and Nasdaq enters correction as chaos over Trump’s tariffs intensifies, CNN
And while the stock market is one indicator of economic health, a far more alarming indicator is flashing red, which is US consumer confidence.
The latest evidence comes from The Conference Board’s Consumer Confidence Index for February, released Tuesday morning. The index fell to 98.3, falling for the third-straight month and marking the largest monthly decline since August 2021, as expectations for inflation in the year ahead climbed. That coincides with the trends reflected in the University of Michigan’s consumer survey for February.
Consumer confidence is a measure of how good consumers feel about the economy, and it’s a critical leading indicator. This is because while the Canadian economy is mostly resource and export-based, most of the US economy is consumption based. US consumers buy a lot of stuff, and that spending accounts for about 70% of the entire GDP. And if you’re worried about your job, your own personal financial situation, or inflation, you’re more likely to put off big purchases, like a new car or a home renovation.
In this way, consumer expectations of a recession can be a self-fulfilling prophecy. If you think a recession’s coming, you spend less, which causes the exact recession you were afraid of. That’s why the Atlanta Federal Reserve is now predicting Q1 GDP to have swung from a healthy 2-3% growth to a 2-3% GDP contraction in Q1.
Remember that a recession is defined as two consecutive quarters of GDP contraction, so the US economy is already on track towards that first negative quarter. If President Trump’s policies don’t drastically change over the next few months, the US will enter a recession.
So with all that dizzying stuff happening in the news, how has our portfolio reacted to all this turmoil?
USA
Not surprisingly, all this turmoil has caused the US index to get whacked. The Vanguard Total Market Index ETF that we use, after enjoying a strong start to the year buoyed by optimism over President Trump’s inauguration, has given up all their gains and is now sitting in the red, at -2.23% YTD. The fact that the White House keeps doing this on-again-off-again thing with tariffs is not helping, and promises to keep this trade war uncertainty weighing on markets for the foreseeable future.
But hey, at least it’s not poor old Canada right now. Given the relative size differences between the two countries, this trade war stuff has got to be hurting the Canadian economy way worse, right?
Canada
…Huh.
So…the Canadian stock market is…outperforming the US right now? How is that possible?
A little perspective is in order.
Up here in the frigid North, this trade war is all we’re talking about. It’s permeated our national conversation, it’s dominated our news cycle, and it’s infected our politics like no other issue in recent memory. However, this trade war is not the only thing Trump is up to.
We have to remember that for the Americans, this trade war is only one of multiple things Trump is doing that is weighing on their economy. Don’t forget about all the other stuff like…
- Ongoing mass deportations of illegal immigrants, which threaten the entire US food supply chain since undocumented workers power everything from picking produce to stocking shelves. If this continues, food costs will go up, contributing to inflation.
- Elon Musk and his Department of Government Efficiency’s mass-firing of federal workers. Not only does this contribute to unemployment and lower spending, since laid off government workers spend less money, but these cuts threaten critical government programs, like Social Security, which could potentially throw millions of senior citizens into poverty
- Public backlash to companies bending the knee to the Trump administration’s anti-DEI efforts has inspired boycotts inside America, against companies like Target and Amazon. Add these domestic boycotts to the international boycotts from Canadians and Mexicans in response to the trade war, and a lot less money is flowing into American companies’ coffers.
All of this adds up to additional dead weight on the American economy that Canada doesn’t have to deal with, so as infuriating as Trump blowing up our economy may seem, remember that he’s blowing up his own economy way worse.
EAFE
So that’s how things are going on this side of the pond, which is to say, not great. But that begs the question: How are things going in Europe? Well…
Holy shit.
So apparently, the EAFE index is up a whopping 11.2% YTD!
Well, I guess we know where all the investment dollars that fled the USA and Canada went.
While the USA and Canada have been bludgeoning each other’s economies (again, for no good reason), Europe, Australia, and the Far East have been benefitting from our infighting.
It makes sense. The largest economy in the EAFE index is Japan, and their largest trading partner is China, not the USA. The EAFE index also covers the EU, which has a population and economy roughly equal in size to the USA, yet isn’t engaging in a trade war with its allies, so that starts to look pretty good right about now if you’re an investor.
Capital hates uncertainty, and North America is a hotbed of uncertainty right now.
Add it all up and Europe is kicking our ass. This might be the year that EAFE breaks out in a big way. Perhaps MAGA should change its name to MEGA: Make Europe Great Again.
Put It All Together
All together, here’s how our overall portfolio has performed so far this year.
This year has really shown the power of global diversification. The past few years of American outperformance have made people question including international markets at all, if they keep underperforming the S&P 500. Well, now we know why. Because occasionally, America goes off the deep end and destroys their own economy for reasons nobody understands.
If you ignored all the news and simply looked at the performance of a globally diversified portfolio like ours, you might conclude that nothing interesting is happening right now. Of course, we know that the exact opposite is true, so the power of diversification cannot be overstated. Nobody can predict the news, but we do know that calamity rarely hits the entire world at once (COVID-19 being the rare exception).
I don’t know what’s going to happen in the coming months and years. So that’s why the best defence in these uncertain times is to spread our bets across the entire world.
How are your investments holding up? And how are you coping with this firehose of news that’s coming at us from all directions? Let’s hear it in the comments below!
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But with the markets more correlated than ever before, does diversification work as well as it used to?
Thanks!
They don’t look that correlated to me right now.
The US is leading the way on losses, and the further away you are from that, the better you’re doing.
The U.S. gets what they voted for…Chaos!
And stock markets were RED HOT just last year. Sigh.
I expected a cold winter, so in mid February I moved a few % of my portfolio to cash. Most of my assets are US stock funds.
As things calm down — I believe they will, at some point — I will move back from cash to a growth fund. Market timing? Hell yeah. Or, since the move is marginal, you can just call it rebalancing.
Portfolio performance is still skewed upwards by the stellar 2024, so as that Chinese statesman said, “The French Revolution? Too early to say.”
I dunno man, when it comes to market timing, getting out is the easy part. Knowing when to go back in is the tricky bit.
I wholeheartedly agree, the whole process is error-prone and far from scientific. An investor (any investor, including the “do nothing” crowd) cannot and shouldn’t fish for a top or a bottom. Rather, she/he weighs risks and opportunities. At this moment, I see that cash offers a marginal opportunity. “Marginal” in the sense that the vast majority of my holdings remains untouched.
Sold everything US, almost at the top, and will hold cash for the next couple of years. Kept the US cash. Kept all Canadian exposure as it’s in non-registered and our dividends come from there. Bought more EAFE. I can’t handle the volatility, and know that I am less concerned about missing out on possible larger gains (the cash is earning interest) than experiencing the stomach churning drops. Logically I know “time in the market” is a much better indicator of success than trying to “time” the market, but saving what I have in very uncertain times gives me a lot of comfort right now. Thanks for all your great articles!
i am long term investor .. as everyone should be who needs income
this is a blip .. i earn $ 580 K + anually in dividends . .. i will just reinvest all the income at these great prices .
at my level it makes no difference to my life if the market is up or down .
i am lucky .
580k! Wow! Can I ask what dividend paying instruments you are invested in and the percentage in each? I would like to share in your indifference! 😉
thanks . the usual Harvest funds and some yieldmax .. about 25 in all . . but also have some growth funds which dont pay dividends .
mostly US markets .
Wow, that is quite the dividend yield. At that rate, your portfolio would have to be $10M+, in which case yeah you’re right you really don’t care about volatility.
I laughed out loud at this part “ Perhaps MAGA should change its name to MEGA: Make Europe Great Again.”
Good times
Reciprocal tariffs will hit Europe at some point. So who knows.
You forgot to address the China tariffs on Canadian goods.
Yeah, the US can tariff Europe, but with the US fighting with Canada, Mexico, Europe, and China, who’s left to trade with them at that point?
And the China tariffs are a response to Canada tariffing Chinese EV’s, which was done at Joe Biden’s request to give a leg up to North American EV manufacturers. I suspect there’s a lot of discussion between Canada and China about trading more with each other rather than the US.
The US markets are crashing again, looks like they think Trump is going to keep doing what he is doing.
It seems logical though, that Trump will gyrate the markets on a weekly basis, and then his associates can literally make billions on the dump and pump.
Who is going to investigate them? No one, they can do anything they want.
Trump can crash and then un-crash the markets, same as crypto coins, and those close to him with the insider info will literally make tens of billions.
It certainly seems that he has no idea what he’s doing — or he’s just doing it to enrich himself and his cronies.
Same thing applies to that midget named Musk.
You can pick at so many things with Elon, why call him a midget? He’s 6 foot tall, what a weird insult. Baseless conspiratorial stock market manipulation. Nothing but Blue Anon in this comment section.
A pump-and-dump scam sounds just like him, but he’s starting to lose the ability to un-crash the market afterwards. Sounds like Wall Street is just sick of his back-and-forth on all this tariff stuff.
The cause of the drop goes beyond just tariffs and recession fears. The world sees that the US is getting taken over by a fascist coup and is losing trust in its market. Trump recently went so far as to suggest that some Treasuries “may not be real”, implying that payments don’t need to be honoured. If the markets take that seriously, its credit rating will collapse.
Also take a peek at the White House’s official Articles page: http://www.whitehouse.gov/articles
It reads like something straight out of North Korea.
Those WH articles are funny and stupid, to say the least.
Yikes, I didn’t even notice that. You’re right, those press releases sound like they’d come out of the NK, or the Chinese Communist Party.
Can you point me in the direction of your current stock/ETF selections?
By the way, I am looking into immigrating to Canada, I just hope it is far enough from Trump and Putin.
A declining CAD is what keeps Canadian indices propped up
…and I think you are absolutely right, expectation of 2.25% rate at the end of this year propping up all Canadian assets
While I acknowledge the benefits of diversification, as a long time investor, my overall 10 years annual return of VUN are WAY higher (nearly double) that of XEF, even with this crash, and expecting more. Being very comfortable with risk and in it for at least 10 years more, I’m trying to figure why I wouldn’t buy this US stock sale (patriotic sentiments aside).
I’d love to hear if anyone is sticking to VTSAX-and-chill strategy still.
I moved all of my portfolio into bonds, dividend and non-US ETFs and real estate in January 2025 therefore my loses are minimal and yield remains the same. Personally, I feel as long as the Musk-Trump union is in effect, the markets are going to be unfavorable. Less than 3 months and already US is heading towards recession, civil unrest, rise in unemployment, Gaza, Greenland, Ukraine-Russia issues and a tariffs war. What will it look like in 4 years of Trump presidency? Even if Trump could be impeached, it could take a long time, and Trump could declare martial law to delay impeachment. Then there would be the steep recovery which would take a few years. Whichever way one looks at it, US is in for a lot of hurt for the coming years.
I am sticking to 100% VTSAX except three year cash/CD EF. I am a believer of JL Collins method, no need for diversification if you hold VTSAX, if the US economy suffers the rest of the world feels it too. No way of escaping it . Hold and chill. Keep buying if you can.
Keep buying. Don’t panic like normal folks are doing.
Hi, new blog subscriber here, and just finished reading your book as well! What are your thoughts on all-in-one etfs like vgro (80% stocks 20% bonds), vbal (60% stocks, 40% bonds) that are globally diversified? They seem easier to hold and auto rebalance, and I’d love to hear what you think of them and how adding preferred shares, yield shield strategy would work for such etfs since they have a yield of 2-2.23% currently. Would someone holding these just buy additional corporate bonds and preferred shares to bring up their yield % ?
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The connections between tariffs, consumer confidence, inflation, and market volatility are explained in a way that’s easy to follow. It’ll be interesting to see how businesses and investors adapt if these policies continue to shift. After keeping up with economic headlines like this, taking a break with something completely different like fnaf can be a nice way to unwind.
Solid reminder that market drops are just buying opportunities for index investors on the path to FIRE. Ignore the noise, stick to the allocation, and let compound growth do its job. games by Habanero Great post as always!