With the US mid-term elections looming early next month, let’s talk Trump today.
Like him or not, the US President is proving to be a major force in driving global share prices. That means he’s become a major influence on the value of your own investments here in the UK.
So what would happen to stocks if he were to leave office, for whatever reason, soon after those American poll results came in?
Surprise Trump triumph.
They say you should never begin an article with an apology.
Well, this isn’t quite the start, so I’m going to offer one now.
I certainly don’t claim to be an expert on American politics. So I’ve asked someone who is – my Strategic Intelligence colleague Jim Rickards.
Jim was one of the few people that expected Donald Trump to be elected. And today I’ve asked him for his opinions on the President’s immediate prospects.
But before we get to these, here’s a snapshot of America’s political scene.
Since his inauguration, the US President has got under the skin of shedloads of people. I’d start listing them but I’d soon run out of space. Government via Twitter is now the order of the day.
Indeed, Trump has wound up his political opposition – the Democratic Party – so much that it can’t wait to ‘impeach’ him under the US Constitution for “treason, bribery or other high crimes and misdemeanours”.
I’m not going to argue that point one way or another. Like him or not, Trump’s the current democratically-elected incumbent of the White House.
For now, anyway. Yet the US mid-term elections, i.e. which are halfway through the four-year presidential cycles, are set for 6 November.
They’re widely expected to see the Democrats winning the House (the US equivalent of the House of Commons) while the Republicans are expected to retain control of the Senate (similar to the House of Lords, though without hereditary peers).
The odds for the former are around 8/15, according to Betfair, i.e. almost two-thirds.
That could be the chance for which the Democrats have been waiting to start the impeachment process.
But this wouldn’t necessarily mean Trump on the way out. Far from it, in fact.
Over to Jim:
“When many people hear the word impeachment they think ‘oh, you’re going to kick the person out’. That’s not correct. Impeachment is an accusation, an indictment. If a grand jury indicts an individual, basically, it charges them with a crime. Then they go to trial and you get a jury, a defence, a hearing, a judge and due process.
“If the Republicans hold the Senate, which I expect, the Democrats can impeach people, but that just throws it over to the Senate for a trial. Actually to remove a president from office you need 67 votes, a two-thirds majority. There’s no way that’s going to happen with 51 or 52 Republicans. Even if the Republicans lost the Senate, you’d still need 15 Republicans to cross the aisle to get to 67. And that’s almost inconceivable.”
Betfair concurs, by the way, making the Republicans heavy 30/100 (that’s 77%) favourites to win a Senate majority.
But wouldn’t talk about impeachment spook the financial markets?
No, says University of Chicago Law and Economics professor M. Todd Henderson.
“Political games in Washington typically don’t matter very much on Wall Street,” he comments. “What’s more, the probability of… impeachment is already baked into the stock price of every company. Markets are constantly adjusting their estimates based on news of all kinds… [including] the president’s latest tweet or even his impeachment.
“The market does not believe Trump will be impeached, or knows that [it] wouldn’t have a big impact on the value of American businesses. Investors could also think a President Pence [currently Vice President] with a Democrat-controlled House (and even Senate) might be good for business. Even if Trump is impeached, his tax cuts for corporations and the rollback of regulations are not likely to be reversed for many years should Pence become president.”
Nothing to worry about?
So there we have it.
Trump or no Trump, stock prices seem to be safe.
Or are they?
Do you remember the days prior to the 2016 presidential election? Much of the talk at the time focussed on what would happen if Trump won. And consensus thinking was forecasting a sharp sell-off on Wall Street that would echo around the globe.
In fact, shares went down for about 20 minutes. The market then decided that the new President was a good thing.
During the near-two-year period since then, the S&P 500 has risen by around a third. That’s despite the sell-off over the last month, but for which the index would be boasting of gains in that timeframe of about 40%.
That’s not all down to Trump, of course, however much he’d like you to believe it is.
The vibrancy of US corporate profits that has helped to propel US equities higher – and that is continuing during the current earnings season, by the look of results so far – has been inspired by factors such as monetary policy that were determined a long time before Trump’s 2016 triumph.
But we can’t argue with the facts. The Donald has been very good for business.
So if – for any reason – he were to depart the US presidency, what would happen to stock prices on Wall Street… as well as London, Frankfurt, Tokyo, etc.?
I wonder if we might see a further sell-off. Equities could start to worry about all the things they’ve conveniently forgotten about, such as potential recession fears, geopolitical risks and increased quantitative tightening (that’s reversing the money printing of the QE – quantitative easing – years). Which would be a highly ironic reaction considering the market’s behaviour of two years ago.