The Fed chief holds the levers of equities, not Trump
It’s hard not to have a grudging admiration for Donald Trump’s chutzpah when it comes to the stock market. He has consistently claimed credit for the rise in the S&P 500 and now he warns that any moves to impeach him would trigger a market crash. There really are no limits to this president’s self-belief.
The fact that Mr Trump felt the need to air his messiah complex on the White House-friendly Fox channel indicates his growing concern, however. The odds of the ultimate presidential humiliation have shortened in the last week since his former lawyer, Michael Cohen, rethought an earlier commitment to “take a bullet” for his old boss. For the first time, investors have started to consider what impeachment might mean for financial markets.
It is, of course, still a relative long shot and that matters to investors, who deal in probabilities. To impeach a president, there needs to be a majority in the House of Representatives in favour. That means Democrats must take the lower house in November’s mid-term elections. To remove the president from office then requires a two-thirds super-majority in the Senate. In the absence of more serious misdemeanours, that is unlikely.
Paying off a porn star may cast doubt on the president’s character but he has a thick skin. It will need Russia to appear on the charge sheet, I suspect, before Trump has much to really worry about. But let’s assume that we do move to impeachment. Is the president right to think that this would trigger a reversal of the market’s now record-breaking run?
It is certainly true that Wall Street has been on a tear since the 2016 presidential election. The US stock market is rising at an annualised rate of about 20pc, roughly twice the longterm average. In part that is a reflection of the strength of the global economy, but it is also a consequence of Trump policy, notably deregulation and tax reform. Corporate earnings grew by around 25pc in both the first and second quarters of the current year and are likely to see growth of more than 20pc for the whole of 2018, with more to come next year. Profits growth has kept valuations in check and given the bull market a new lease of life. GDP, meanwhile, is growing at more than 4pc a year, while unemployment has fallen below 4pc. You would have to be unduly partisan not to attribute some of that to the president.
However, there are other reasons to think that investors would shrug off a bid to remove the president. The first is that the most economically positive policies are now in the bag. Were Trump to be removed, his replacement, Mike Pence, would be unlikely to change tack from an agenda that is more Republican than particularly Trumpian. He would also implement that policy agenda in a more predictable manner and be less prone than his boss to destabilising outbursts on Twitter. Most importantly, the market would welcome an easing in the president’s weaponisation of trade policy, which scarcely anyone outside the inner circle thinks is a good idea.
History tells us that investors are happy to look through political turbulence in Washington and focus on the economic and market fundamentals instead. When Richard Nixon resigned rather than face impeachment, the market responded positively to a clearing of the air after the Watergate scandal, although it is very hard to disentangle the influence of politics from everything else that was going on in the early Seventies. Stock markets had been in freefall since the beginning of 1973 amid the fallout from the collapse of the Bretton Woods currency framework and the first oil shock. Shares would have probably rallied anyway.
Perhaps more interesting is the impeachment of Bill Clinton in December 1998 after he lied about his affair with Monica Lewinsky. Look at a chart of the market from then to his acquittal in February 1999 and you would be none the wiser about what was going on in Congress. Relief at the Fed’s rapid response to the collapse of the Long-term Capital Management hedge fund and the nascent dotcom bubble papered over the cracks and the market carried serenely on.
So, Donald Trump’s woes are unlikely to be what triggers the end of the bull market, which on one measure at least became the longest ever last week. I’m unfazed by the duration of the market rally and certainly don’t see it as a reason in itself to worry. While it is now longer than the technical bull market from 1990 to 2000, it pales in comparison with the real upswing from 1982 to 2000. That was the real recordbreaker, a run merely punctuated by a couple of savage corrections in 1987 and 1990 and which saw the S&P 500 rise 15-fold in 18 years.
A bull market does not die of old age, particularly when it is still only half as long as the previous record, as my reckoning suggests. This is especially true when valuations are far from over-optimistic and when sentiment is notably lacking the euphoria that typically marks the end of the cycle. What kills a bull market is fear of recession, usually triggered by excessive zeal from the Federal Reserve.
That is why the more important comments at the weekend were not from the president but from Fed chair Jay Powell at the gathering of central bankers at Jackson Hole in Wyoming. Viewed through his eyes there is nothing to deflect the Fed from steady normalisation of monetary policy. He carries a heavy responsibility but is up to the job. The president may think he makes the market weather; Mr Powell really does.
Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.
‘A bull market does not die of old age, particularly when it is still only half as long as the previous record’