Market impacts of U.S. election

The recent U.S. presidential election has sparked discussion about the potential economic impacts, though the full consequences remain uncertain, says Avery Shenfeld, chief economist with 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,” Shenfeld said in a Nov. 7 interview.

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For example, proposed tax cuts and increased spending in the U.S. would expand the country’s budget deficit in 2026. However, fiscal conservatives in Congress would likely push for spending cuts to offset any new measures, Shenfeld said; plus, some tax cuts are simply “extending existing tax measures, rather than fresh stimulus.”

A key economic concern is the shift toward protectionism. Higher tariffs and stricter immigration controls, with subsequent slower population growth, could weaken U.S. economic performance in the coming years.

Tariffs would raise prices and are thus “a tax on American consumers,” Shenfeld said.

And retaliatory tariffs from other countries could mean U.S. workers are shifted into industries in which the U.S. is less competitive, resulting in lower output per worker.

“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,” Shenfeld said.

Still, he was cautiously optimistic on one point: “Best bets are that we still have a soft-landing outcome for the U.S. economy,” he said.

That scenario is based on U.S. growth decreasing to about 2%, a pace that takes slower population growth into consideration and keeps the labour market close to full employment, with inflation gradually decreasing to the Federal Reserve’s 2% target.

“This is still a fairly healthy outcome for the U.S. economy, but it’s a much more uncertain road,” Shenfeld said.

For Canada, the election of a protectionist U.S. president is “a big risk,” he said. For example, the proposed tariffs could harm business confidence within Canada’s export sector, he said, with businesses holding back on capital spending.

On a positive note, Canada’s inflation rate has dropped below the Bank of Canada’s 2% target, so rate cutting can continue and support economic growth.

“So, still a soft landing [for Canada’s economy], even though a much more uncertain path in the wake of the U.S. election,” he said.

When it comes to specific U.S. sectors, Shenfeld said energy, particularly oil and gas, could benefit from less stringent climate-related policies and broader effort to ensure U.S. self-sufficiency when it comes to energy.

“So, certain sectors of the [U.S.] economy, those heavily regulated by governments or in the energy sector, are seen as winners,” Shenfeld said. 

U.S. businesses reliant on imported components or that sell imports face uncertainty due to the potential tariffs.

For Canadian equities, the election’s outcome is less positive, given the potential for tariffs and no plans for deregulation at this point, Shenfeld said. In the near term, the election is “a bit of a cautionary note for some of our export sectors,” he said.

However, some sectors in Canada could be winners.

“The U.S. may well pursue more active use of nuclear power, for example,” Shenfeld said. “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.”

Canadian companies with substantial U.S. operations could benefit from the election’s outcome: “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,” Shenfeld said.

He also noted the bond market selloff leading into the election and once Trump was declared winner, as longer-term interest rates rose. “That’s largely on fears that the U.S. will run much bigger deficits come 2026,” Shenfeld said.

However, “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,” he said.

He also noted that investors face uncertainty regarding the Canadian-U.S. exchange rate.

“If tariffs go ahead, we could see a much weaker Canadian dollar. If they don’t go ahead, the Canadian dollar could recover,” Shenfeld said. “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.” 

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