Market Impacts of U.S. Election

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Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject matter experts themselves. 

Avery Shenfeld, chief economist at CIBC. 

It’s important for investors to recognize that there’s a big gap between what is said on a campaign trail by a presidential candidate and what ultimately happens on the policy front.  

The U.S. runs a divided system, where Congress itself plays a big weight in fiscal policy, has to approve much of what a president might want to do on taxes or spending. And of course, presidential candidates may promise things that they don’t follow through on.  

I think it’s pretty clear that the U.S. is going to become more protectionist in the coming few years. Unclear what that level of tariffs will be or how that will specifically apply to Canada, but it’s certainly a material threat. They’re going to tighten the border and have fewer immigrants coming in — legal and perhaps illegal as well, so both sides, a slower population growth. 

And on fiscal policy, while much is being made of the promise of big tax cuts to all sorts of people in the U.S. and a big increase in the budget deficit for 2026, the reality is that there are fiscal conservatives in Congress that will push for offsetting spending cuts, and some of the tax cuts are really just extending existing tax measures, rather than fresh stimulus.  

So, we need to take all of these campaign promises with a little bit of a grain of salt. They give us direction, but they don’t really give us the details. 

The equity markets have responded with some cheer, but I don’t think this is an outright win for the U.S. economy on several fronts. For one, if you do go ahead with tariffs, that is a tax on American consumers. It will raise prices. Not everything Americans import can be produced at home, and where there is no domestic competition, the price of the tariff will be passed on to consumers. So, it’s like a consumer tax that will slow growth.  

As well, shifting U.S. workers from industries where the U.S. now exports but may face retaliatory tariffs from other countries into industries where the U.S. is not as competitive and tries to produce substitutes for imports — that could lower output per worker as well. So, we’re not really all that enthusiastic about the growth implications over the medium term from a more protectionist U.S., given that other countries are likely to respond by putting retaliatory tariffs on American exports.  

Fiscal stimulus in 2026 could help. Certainly, some tax cuts will provide some additional spending. But the reality is that the U.S. economy is facing a necessary deceleration, because they’re going to be slowing population growth, and there isn’t as much room for non-inflationary economic growth when you’re not adding as many workers.  

That said, best bets are that we still have a soft-landing outcome for the U.S. economy, where growth slows to something in the vicinity of 2%, and that matches up with slower population growth to keep the labour market essentially close to where it is. In other words, pretty close to full employment, and allows inflation to gradually decelerate to the 2% target.  

So, this is still a fairly healthy outcome for the U.S. economy, but it’s a much more uncertain road.  

For Canada, the election of a protectionist president in the U.S. is a big risk. Even in the interim, before we find out whether these tariffs are going to apply to Canada or not, it could hit business confidence in our export sector, cause Canadian businesses to hold back on capital spending projects. So, in the near term, this does look like a headwind for the Canadian economy.  

Fortunately for Canada, we’re in a position where inflation has already dropped below the 2% target that the Bank of Canada has. That means that they’re going to cut interest rates enough to make sure that not only is the economy protected, but actually they’re looking to accelerate the economy. So even before the election, we were expecting the overnight rate to get down to two and a quarter percent to support economic growth, and if these trade risks materialize, then we may get additional rate cuts to try to get more domestic growth and things like housing and consumer spending to offset some of the headwinds we might face on the export side. So, still a soft landing, even though a much more uncertain path in the wake of the U.S. election.  

Canada, of course, can take some steps to try to help itself out with the new administration. So, we expect a pretty big lobbying effort, not just by governments, but by businesses reaching out to their customers in the U.S. to try to reinforce the message that we successfully delivered to Donald Trump when he was first president. Which is that Canada and the U.S. are intertwined economies, both parties benefit from two-way trade between these two countries, and that preserving that free trade access between Canada and the U.S. is also a value to the U.S. economy. And we hope that at the end of the day, with perhaps some renegotiation of some of the terms of the existing trade deal, we can maintain that sort of access.  

But in the near term, we do still face these uncertainties until such a deal is cemented. 

We’ve seen the immediate reaction in financial markets. There’s been some gains in U.S. equities, particularly from companies that might benefit from a less severe regulatory environment. Deregulation was something that the Republicans talked about during the campaign, so it will help them on that front. The energy sector, particularly oil and gas, benefiting from perhaps a less stringent set of policies on the climate file and a broader effort to ensure U.S. self-sufficiency in energy. So, certain sectors of the economy, those heavily regulated by governments or in the energy sector, are seen as winners.  

But that said, there are companies, of course, that are in businesses that rely on imported components or parts, or retailers that sell imported goods. There, there’s a bit more uncertainty in terms of their access to those imported goods, or at least the tariffs that could be imposed on them.  

The bond market has had a pretty big selloff. Longer-term interest rates were moving up as we got closer to the election date, and moved up further when Donald Trump was declared the winner. And that’s largely on fears that the U.S. will run much bigger deficits come 2026 than might have been the case had Trump been elected.  

Our view is that that may be a bit of an overstatement. That in fact, at the end of the day, Congress wields a lot of authority on budget balances because they control spending bills and tax bills, and that fiscal conservatives in the Republican Party will push for spending cuts — not to bring the deficits down from where they’ve been, and they’re certainly too large on a long-term basis for the U.S. to continue to run them, but rather to prevent them from escalating dramatically and increasing the Treasury’s need for financing that would push up long-term rates. So, at the end of the day, I do think that long-term rates, which went up on this election, could come back down, which generates a nice return for bond investors if you buy at the high-end yields and then ride those yields lower. I think that’s one of the consequences.  

The Canadian dollar is a bit of a mixed picture right now. If tariffs go ahead, we can see a much weaker Canadian dollar. If they don’t go ahead, the Canadian dollar could recover. So, it’s a much more uncertain environment for the exchange rate at this point, and that’s something that investors need to take into account when they think about their asset allocation across the Canada-U.S. border.  

This election in the U.S. isn’t quite as a clear positive for Canadian equities as it is for the U.S. They’re not looking at a less regulatory environment in Canada at this point because of the U.S. election, and there’s going to be some concern that those sectors that are dependent on exports to the U.S. could face a headwind from those tariffs.  

So, you know, we’ve had a long period where U.S. equities outperformed Canada. A lot of that was the tech sector booming in the U.S. and the lack of an equivalently sized sector here in Canada. But I think in the near term as well now, we’ve reinforced that gap a bit by these fresh uncertainties for Canadian policy. And the hopes are that if we are able to negotiate a decent trade deal with the U.S., that some of those uncertainties will fade away. But in the near term, that is a bit of a cautionary note for some of our export sectors.  

There are other sectors where I should think that Canada could be a winner from this. The U.S. may well pursue more active use of nuclear power, for example. So, Canada is a major exporter of uranium in competition with Russia and its allies, which the U.S. obviously doesn’t want to trade with. So, it’s not a clear loser for Canadian equities. And there’s certainly Canadian companies with substantial U.S. operations, and to the extent that there are corporate tax cuts in the U.S. or some additional enthusiasm in the U.S. markets these days, some of that is spilling over into Canadian equities.