If the noose is tightening around Donald Trump, should investors be worried?
Richard Harris says the recent scandals surrounding the US president have not fazed financial markets, given that the likelihood of Trump being ousted is low
As an investor, the perspective of distance is often a blessing. Being close to a situation increases the noise and heightens the panic that causes investors to behave irrationally. It is quite natural, then, for international markets to comment on US political news as they do on domestic affairs.
Stock markets woke up on Wednesday to what was touted as heady legal news. President Donald Trump’s former personal lawyer, Michael Cohen , had pleaded guilty to violating campaign laws (among other things), saying he paid pre-election hush money to a woman who claims to have had an affair with Trump.
At about the same time, news came through that a jury in Virginia had convicted former Trump campaign manager Paul Manafort on bank and tax fraud charges. Could the noose be tightening around the president himself – and how does that affect our money?
In politics, junior staff always take the rap for their seniors. It is part of the process to protect the centre. The system is like an onion and opponents have to work through the lesser fry and usually fail or give up before reaching the main man (or, in Theresa May’s case , woman). Despite the excitement in Washington, the trials themselves do not directly impinge on Trump except for the fact that Cohen seems to be relying on the “he made me do it” defence.
Watch: Trump’s ex-lawyer Michael Cohen pleads guilty
Markets rely on fresh news to reprice assets and they saw little new to get excited about in the news. The main indices on Wall Street were a sea of green, albeit by a small amount, and the rest of the world didn’t seem to care either, with Europe and Asia up across the board (save Australia and China, which had separate issues).
The markets are not stressed about the possibilities of legal action reaching the president because Trump is a long way from having his collar felt. Cohen is primarily accused of a number of fraud cases unconnected with his legal practice. Manafort was convicted for actions outside his campaign activities. The only overlap was on one of Cohen’s charges and the court will decide whether the allegations about payments he made could be construed as “campaign contributions”.
More importantly, even if special counsel Robert Mueller’s tide of allegations about Russian interference in the US presidential election rise up around Trump, he has a number of arguments – the key one being whether obtaining intelligence on your political opponents is actually wrong.
Dirty play has long been part of the political process and to be made illegal, rather than a less ethical part of the game, would empty most of Congress. Even if Mueller finds a smoking gun, there will be months of splitting hairs about the definition of “foreign influence”. It all takes time and the record of successful impeachments of US presidents stands at an unimpressive zero, although Nixon resigned before the event.
Watch: Donald Trump claims he misspoke about Russia’s alleged election meddling
In the unlikely chance Trump’s detractors were successful, how would markets respond? Trump’s most significant action is old news, which was to give corporations a big one-off tax break , which has created the current mini-boom by pumping at least US$1.5 trillion into the economy. It would be far-fetched to believe that the Democrats would reverse the move and vote for higher taxes.
Internationally, the markets would probably jump, as the pressure on trade tariffs would come off – yet the legacy of Trump’s policies will not go away. The genie of “trade fairness” is well and truly out of the bottle and although the aggressive language would fade, it is unlikely that the general principle will just disappear.
Markets have already discounted old or evolutionary news but will especially react to new disruptive information. As much of the legal news is old or at least guessable, markets would require many more data points that are truly surprising to make them tremble. The lessons of history and present form tell us that Trump has a good shot at a second term because politics is a long game and the Democrats have first to win back Congressional seats.
Little change in the news is exactly why markets are not reacting much to Washington. Investors are more worried about what Trump will do in the future than what he may have done in the past.
Richard Harris is a veteran investment manager, banker, writer and broadcaster and financial expert witness. www.portshelter.com