How Trump’s return could crash Canada’s economy: Here's where to park your cash

Impact of Donald Trump's presidency on Canada's economy

Donald Trump's return to the presidency could profoundly affect Canada's economic landscape, given that more than 75% of Canada’s exports are US-bound. This suggests even a relatively small tariff could reduce Canada's GDP.

For instance, if Trump were to impose a 10% tariff on Canadian goods exported to the US, this could result in a GDP drop of 0.9%, annually — about CDN$19.3 billion, based on Canada's GDP of $2.14 trillion in 2023.

Expect Canadian concessions

Trump's previous approach to trade was marked by higher tariffs and additional demands. As a result, Canadians can expect that Trump will focus on the Canada-United States-Mexico Agreement (CUSMA) — and should anticipate drastic changes, even before the agreement reaches the mandatory 2026 review deadline.

Economists with Desjardins estimate that new Trump tariffs could increase inflation in Canada by as much as 1.7%, pressuring the Bank of Canada to raise rates. These tariffs would raise costs, adding inflationary pressure to goods and services, which could prompt an increase in the Bank of Canada’s overnight rate.

Trump's fiscal policies could further strain Canadian budgets

Moreover, Trump's expansive fiscal policies — characterized by tax cuts and increased government spending — could drive US inflation with spillover effects in Canada. Rising US inflation would particularly affect Canadian imports, pushing up consumer prices and eroding purchasing power.

Additionally, higher U.S. Treasury yields, influenced by these policies, could lead to increased fixed-rate mortgage costs for Canadians. Since fixed interest rates are heavily influenced by the five and 10-year Treasury yields, this could add further strain to household budgets in both countries.

For Canada's energy sector, the outlook is similarly concerning. While direct tariffs may not be imposed on energy exports, Trump's push for US energy independence could depress global oil prices, significantly reducing revenues for Canadian producers. Considering that energy exports make up 30% of Canada’s goods sent to the US, lower oil prices could trigger job losses in oil-dependent regions and shrink family incomes.

Lastly, potential shifts in immigration policy, particularly large-scale deportations, could lead to a surge of migrants northward. Such an influx could strain housing and social services in Canada, compounding economic challenges.

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Predicting a stock market downturn

Tighter fiscal policies don’t always result in market downturns, but uncertain economic conditions signal that investors should protect their portfolios. To do this, investors need to be mindful of when market downturns occur and how long they last. According to analysts, the stock market has crashed 13 times since 1950, with the average length of time before the rebound lasting almost one year? To be considered a crash, stock prices must decline suddenly and dramatically — usually by 20% or more — and hit a few sectors, simultaneously.

Many experienced investors prepare for downturns by realigning their portfolios, selling off non-strategic holdings, and increasing cash reserves.

In general, cash holdings provide a secure and flexible foundation to protect your portfolio but also offer some upside benefits. For instance, experienced investors will use their cash reserves to jump on future investment opportunities while keeping a portion of their portfolio liquid and protecting it from market fluctuations and downturns.

Three ways to keep cash

While there are various ways to keep cash, two of the most common and easiest-to-implement options are to stash your cash in a money market fund or to open a high-interest savings account.

Keeping cash in a money market fund

A money market fund is a type of mutual fund that invests in short-term, highly liquid and low-risk debt instruments. These funds aim to provide investors with a safe place to park cash while earning a modest return, typically higher than a standard savings account.

Most of the big banks offer a money market fund, meaning you can buy and sell shares in these funds through any trading platform.

If you plan to park your money for an undetermined amount of time, you may want to consider funds with better historical performance. Good options include:

• Purpose High-Interest Savings ETF (TSX:PSA): With a yield of 5.05%, it’s one of the highest-yielding funds currently available. It invests in high-interest savings accounts at major Canadian banks, offering a low-risk option with monthly distributions.
• Horizons Cash Maximizer ETF (TSX:HSAV): This ETF boasts a yield of 5.30%, which is among the best returns for a money market ETF. It reinvests all income, increasing the fund’s net asset value (NAV) daily, and offers a very low MER of 0.12%, making it an attractive option for tax-sheltered accounts.
• CI High Interest Savings ETF (TSX:CSAV): Offering a yield of 4.90%, this ETF is also a popular choice for those seeking a low-risk investment in Canadian dollar-denominated high-interest savings accounts
• BMO Money Market Fund ETF Series (TSX:ZMMK): This fund offers a yield of 4.98% and primarily invests in short-term government and corporate debt, providing stable returns with low-risk.

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Keeping cash in a high-interest savings account (HISA)

During a stock market correction, many investments lose value rapidly, and liquidity becomes crucial. By keeping your cash in a secure bank account that earns a higher interest rate, you not only protect your money, but you remove the volatility to your portfolio. Unlike stocks or mutual funds, cash in a HISA is not subject to market fluctuations, ensuring that your savings are safe from financial losses. Plus, cash in a HISA ensures you have readily accessible funds to cover expenses or invest when better opportunities arise. That's because cash in a HISA is readily accessible, making it easy to withdraw funds for emergencies, expenses, or investment opportunities.

Read More: Pick the best high-interest savings account

Lock-in today's higher interest rates with a GIC

One other option is to park your cash in a guaranteed investment certificate (GIC). Investing in GICs is an effective strategy for saving as it offers several benefits that align with financial security and growth:

• Fixed Interest Rates: GICs provide a guaranteed return on your investment at a predetermined rate, shielding you from market volatility.
• Predictable Growth: You know exactly how much your savings will grow by the end of the term, making them an excellent choice for conservative savers.
• Zero Risk of Loss: GICs are one of the safest investment options, as your principal is fully protected. They are particularly attractive to risk-averse investors.
• Deposit Insurance: Most GICs in Canada are insured up to a certain limit by the CDIC or provincial counterparts, further safeguarding your investment.
• Higher Yields: GICs often offer higher interest rates compared to regular or even high-interest savings accounts, rewarding you for committing your money for a fixed term.

Read More: Find the best GIC rates

5 reasons to park your cash

To appreciate whether or not you should consider increasing a portion of your portfolio and keep more cash — as a smart hedge during a stock market correction — consider these five reasons for keeping cash.

#1. Cash offers liquidity and safety during equity market downturns

During a stock market correction, many investments lose value rapidly, and liquidity becomes crucial. Cash in a high-interest savings account remains safe from market volatility. Unlike stocks, which can see sudden drops in price, your cash balance is secure and unaffected by market swings. This ensures you have readily accessible funds to cover expenses or invest when better opportunities arise.

#2. Cash in high-interest accounts earns interest while staying liquid

In a typical savings account, the interest rates are low, and inflation may erode the purchasing power of your cash. However, a high-interest savings account offers a better yield, allowing you to earn more on your cash reserves. While the interest may not outpace inflation entirely, it provides some return on your money, helping it grow modestly while staying liquid and accessible.

#3. Having cash offers opportunistic buying opportunities (buy low and sell high!)

Holding cash during a market correction puts you in a strong position to take advantage of investment opportunities. When stock prices fall during a correction, many high-quality assets may become undervalued. Having cash on hand allows you to buy stocks, bonds or ETFs at lower prices, capitalizing on the potential for future growth once the market recovers.

#4. Minimized risk

When stock markets correct, there is often widespread uncertainty. Holding cash in a high-interest savings account minimizes your risk exposure. Unlike investing in the market, where losses can be substantial, cash in a savings account is typically insured (in Canada, this would be through the CDIC, up to a certain limit), reducing the risk of losing your principal.

#5. Preserving capital

One of the main objectives during a market correction is to preserve your capital. By keeping a portion of your portfolio in cash, you are preserving that capital and ensuring it doesn’t suffer from the same market losses as your equity investments might. High-interest savings accounts, while not offering high returns, can serve as a stable part of a diversified portfolio, providing balance in turbulent times.

Bottom line

Whether you open a high-interest savings account or invest in a money market fund, both options offer strong returns compared to traditional savings accounts plus, investors get the benefit of accounts that keep cash highly liquid, which is excellent for conservative investors looking to park cash during volatile market conditions.

Sources

1. Covenant Wealth Advisors: Understanding Stock Market Corrections and Crashes (2024) (Sept 26, 2024)