Should Canadian investors care about U.S. election?

Photo: AP Photo/Alex Brandon

Republican presidential nominee, former president Donald Trump, left, and Democratic presidential nominee, Vice-President Kamala Harris, right.

As the United States gears up for its next presidential election, Canadian investors are once again faced with the question: How much attention should they pay to the outcome?

Given the size and influence of the U.S. economy, political changes south of the border can have significant implications for global markets, including those in Canada. But while it may be tempting to make hasty decisions based on election results or polling data, it’s crucial for investors to take a measured approach when considering changes to their financial plans or portfolios.

Even more important, it’s crucial to only make changes based on the actual implications of election results and not let your personal political beliefs cloud your judgement. Just because you don’t like one candidate or the other, it does not mean you need to overreact.

The U.S. election's broad impact on markets

The U.S. is the world’s largest economy and a major trading partner for Canada. Any changes to economic policy, trade agreements or regulations can ripple across global markets and directly impact Canadian industries, particularly those that are heavily interconnected with the U.S., such as energy, technology and manufacturing.

Markets tend to react to shifts in fiscal policy, tax regimes, and regulatory frameworks. For example, a more business-friendly administration might implement tax cuts, deregulation or stimulus packages aimed at boosting growth, which could benefit stock markets. Conversely, a government with a focus on increased regulation or taxation could create headwinds for certain sectors, particularly those that are energy-intensive or reliant on free trade agreements.

Historically though, U.S. elections have influenced market behavior to a larger degree based on emotions, with volatility often increasing as election day nears and uncertainty dominating the headlines. Time and time again, much of this volatility has proven to be based more on people’s political views and less on fundamentals.

What does that mean for Canadian investors?

It kind of sounds like I’m saying two different things here and I guess I am. The reality is that election outcomes can and will have some impact on the markets but at the same time, you should not overreact.

Canadian investors, especially those with exposure to U.S. equities or sectors heavily influenced by U.S. policy, should keep a watchful eye on key issues in the election. Some of the most significant areas to monitor include:

1. Trade policy: U.S. elections often result in shifts in trade policy, particularly in relation to Canada. Whether the U.S. leans toward protectionism or continues to embrace open trade agreements will have a major effect on Canadian exports, particularly in industries like automotive, agriculture, and energy. Investors with exposure to these sectors may want to monitor trade-related developments closely.

2. Energy policy: The future of U.S. energy policy could have a major impact on Canada’s oil and gas sector, which is closely tied to U.S. demand and regulations. A shift toward greener policies and renewable energy could create both challenges and opportunities for Canadian companies. Investors with holdings in energy stocks may want to diversify their portfolios if they feel policy changes could negatively impact the sector.

3. Interest rates and inflation: The U.S. Federal Reserve’s monetary policy can indirectly influence the Bank of Canada’s decisions. If the U.S. government embarks on large-scale spending programs or cuts taxes, inflationary pressures could increase, leading the Federal Reserve to increase interest rates. This would likely put pressure on Canadian interest rates and could affect mortgage rates, the cost of borrowing, and fixed-income investments.

4. Fluctuations: The outcome of the U.S. election can impact the value of the U.S. dollar relative to the Canadian dollar. A weaker U.S. dollar might benefit Canadian exporters but could increase the cost of imported goods and travel to the U.S. Investors with significant U.S. exposure might want to consider the implications of currency fluctuations on their portfolios.

Should you make changes to your financial plan?

For most Canadians, the answer is, not necessarily. While the U.S. election can create uncertainty and short-term volatility in the markets, making drastic changes to your financial plan based on the results is rarely advisable. Here are a few key considerations:

• Avoid reacting to short-term volatility: Elections often bring volatility, but markets tend to stabilize after the initial shock. Investors who make knee-jerk decisions based on political events may miss out on potential long-term gains. A well-diversified portfolio can help mitigate the impact of short-term market fluctuations.

• Stick to your long-term strategy: If you have a solid financial plan in place, it's likely designed to weather periods of uncertainty, including election cycles. Rather than trying to time the market or predict the outcome of an election, focus on your long-term goals and risk tolerance. Rebalancing your portfolio to align with those goals may be more productive than reacting to political events.

• Consult your financial planner: If you're concerned about the impact of the U.S. election on your investments, it may be a good time to check in with your professional financial planner. They can help you assess your exposure to U.S. equities, interest rate risk, and currency fluctuations, and provide advice tailored to your specific situation.

While the outcome of the upcoming U.S. election will undoubtedly have implications for global markets, including those in Canada, it’s essential for investors to maintain a long-term perspective. Making changes to your financial plan based solely on political events and beliefs can lead to unnecessary risk and missed opportunities. Instead, focus on maintaining a diversified portfolio that can weather various market conditions, and consult your financial planner if you're unsure about how to proceed.

By staying informed and sticking to your strategy, Canadian investors can navigate the uncertainty of U.S. elections without derailing their long-term financial goals.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.