U.S. President Donald Trump declared a trade war, taxing imports from Canada and China. After a conversation with the respective world leaders, U.S. tariffs on Mexico are on hold for a month, while U.S. tariffs on the European Union will come later.
The trade war between the U.S. and Canada has intensified, with President Donald Trump imposing significant tariffs on Canadian goods, triggering immediate market reactions. Canada, in turn, has pledged retaliatory tariffs on U.S. imports. For Canadian investors, the key question is: How will this affect TSX stocks in the short term and long term?
CBC reported, “Trump imposed a 25% tariff on virtually all goods from Canada and a lower 10% tariff on Canadian energy products. That means there will be a fee on Canadian products entering the United States. Likewise, the Canadian government has pledged to hit the U.S. with retaliatory 25% tariffs on $155 billion worth of American goods coming into Canada. There will be an immediate $30 billion implemented on Tuesday (which is today), and the remaining $125 billion in 21 days.”
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Immediate market volatility
In response to the tariffs, the Canadian stock market took a hit, with the TSX sliding as much as 3% since Friday’s trading. While this knee-jerk reaction may seem alarming, it’s important to remember that market reactions, especially to geopolitical events, can be swift and temporary. As of the latest data, the market has already rebounded by over 1%, showing signs of “buy-the-dip” action by investors looking to capitalize on the short-term volatility.
This is a reminder that investors need to focus not on the day-to-day swings, but on the long-term fundamentals of the companies they hold.
The case for Canadian Pacific Kansas City
Take Canadian Pacific Kansas City (TSX:CP), a prime example of a stock that has seen significant fluctuations in the wake of the trade war. CP stock dropped by as much as 10% from Friday’s close but has since rebounded nearly 6%. Despite the turbulence, CP remains a solid pick for long-term investors.
Why? The company operates a railway network that spans Canada, the U.S., and Mexico – positioning it well to benefit from North American trade, even amidst a trade war. CP is expected to grow its earnings per share (EPS) by 12–15% annually over the next few years.
At around $109 per share at writing, CP trades at a blended price-to-earnings (P/E) ratio of approximately 25.5, which suggests it’s fairly valued. The consensus price target of analysts implies an 11% discount, signaling that CP could be slightly undervalued. Furthermore, CP enjoys an investment-grade S&P credit rating of BBB+, providing an additional layer of security for risk-conscious investors.
In short, CP offers a prime opportunity for those looking to buy the dip.
Toronto-Dominion Bank: A defensive play
Another stock experiencing similar volatility is Toronto-Dominion Bank (TSX:TD). As one of Canada’s largest banks with a significant retail presence in both Canada and the U.S., TD is well-positioned to weather economic uncertainty. While it underperformed last year, returning only -6% compared to the 24% gain of the BMO Equal Weight Banks Index ETF, it’s important to look beyond short-term performance.
TD stock fell to as low as $79 per share during the initial trade war fallout but has since bounced back by 4.4% to around $82.50. With a solid dividend yield of about 5.1%, TD offers attractive income for investors willing to wait for long-term capital appreciation. For those looking to ride out the volatility, TD is a reliable, blue-chip pick.
The Foolish investor takeaway: A strategy for uncertainty
While short-term market fluctuations are inevitable in times of geopolitical tension, history shows that stocks of well-managed companies tend to recover and even thrive in the long run. For investors looking to make the most of the current market volatility, focusing on businesses with strong fundamentals and long-term growth potential, like CP and TD, could prove to be a smart strategy.
The key to navigating the U.S.-Canada trade war is to keep a cool head and stay focused on the long term. In times of uncertainty, the best opportunities often arise from temporary setbacks – just as we’ve seen with CP and TD recently.
