Here’s our view on the presidential election effect on the stock market

Lots of Canadian and international investors were worried about the U.S. political situation and the subsequent election effect on the stock market.

Some worried that if Democrat Hillary Clinton won the U.S. Presidency, lots of bad things would happen. Others worried that if Republican Donald Trump won, other bad things would happen. This reminded me of the “trash talk” that you’ll hear from the opponents in a wrestling match. It’s all about selling more tickets and attracting more viewers.

What the election effect on the stock market (and Trump’s win) means for Canadian investors

It seems to me that Canadian investors are paying too much attention to U.S. politics, and too little to the specifics of Canada’s situation.

Canada has managed to control its federal spending much better than the U.S. Our federal debt as a percentage of Gross Domestic Product is about where it was a decade ago, while the ratio in the U.S. has doubled. (That’s the reverse of the situation 20 years ago, when our finances were in a mess and the U.S. had its spending under much better control than today.)

We have cordial relations with the U.S. and we do a great deal of profitable trading with them. That’s unlikely to change, even under President Trump. Canada offers a more favourable business environment than the U.S. Our top federal corporate tax rate is now 26.5%–the top U.S. rate is 39%. This disparity is symptomatic of the difference in our two political systems. With effective lobbying in Washington, companies and industries can win special treatment and a lower tax rate. That’s much harder in Canada.

The resource markets are a crucial element in Canada’s economy, and far more important to us than to the U.S. This is a boom/bust sector, and it’s currently in the “bust” phase. No one can say when the sector will go back into a boom phase, as it inevitably will. Prices of most resources are down near post-recession lows, however. So their next big move is likely to be upward.

As long as the Resource sector stays depressed, our Canadian market is likely to lag behind the U.S. market. However, that next big rise in resource prices could start abruptly. So we are going to maintain our current relatively low holdings in the Resource sector, and keep a close watch on the situation.

Summing up: the election effect on the stock market

Overall, I’d say that investors and the media in the U.S. and Canada are taking an unduly negative view of the market outlook. In particular, they fail to take into account the fact that the world no longer has to worry about running out of oil or gas. That alone eliminates one of the most vexing economic problems of the past 40 years.

With that in mind, we are going to continue to invest as we have: focusing on company fundamentals and portfolio construction, rather than predictions about price trends. However, my best guess right now is that the market will be substantially higher by the end of the year than it is today.

What do you think of the election effect on the stock market? Share your thoughts with us in the comments.