Friday , September 22 2017
Home / The Capital Spectator / Mr. Market Demands A Bigger Discount For Political Risk

Mr. Market Demands A Bigger Discount For Political Risk

Summary:
Political turmoil swirling around President Trump reached critical mass on Wednesday, triggering a selloff in the US stock market. One concern is that the administration’s pro-growth policy proposals are vulnerable if the White House is forced to address the chaos, much of it self-inflicted, that threatens to overwhelm Washington. “The market is kneecapping Trump because of his constant crises, that now look potentially terminal,” says Eric Schiffer, chief executive of the Patriarch Organization, a private-equity firm. “The froth came from the belief that tax reform was coming, infrastructure was coming and trade adjustments were coming. With Trump under immense fire, all of those things go into suspended animation.” The S&P 500 fell 1.8% yesterday (May 17), closing at a four-week

Topics:
James Picerno considers the following as important:

This could be interesting, too:

James Picerno writes Will The Fed’s Rate-Hike Plans Eventually Trigger A Recession?

James Picerno writes Macro Briefing: 22 September 2017

Mark Hines writes Stock Exchange: Climbing the Wall of Worry

James Picerno writes Investor Returns vs. Market Returns: The Failure Endures

Political turmoil swirling around President Trump reached critical mass on Wednesday, triggering a selloff in the US stock market. One concern is that the administration’s pro-growth policy proposals are vulnerable if the White House is forced to address the chaos, much of it self-inflicted, that threatens to overwhelm Washington.

“The market is kneecapping Trump because of his constant crises, that now look potentially terminal,” says Eric Schiffer, chief executive of the Patriarch Organization, a private-equity firm. “The froth came from the belief that tax reform was coming, infrastructure was coming and trade adjustments were coming. With Trump under immense fire, all of those things go into suspended animation.”

The S&P 500 fell 1.8% yesterday (May 17), closing at a four-week low. The slide looks dramatic in the wake of an unusually calm market environment. But let’s keep yesterday’s decline in perspective. Looking at the S&P’s recent history in terms of weekly changes (see chart below) suggests that the latest drop is noise.

Mr. Market Demands A Bigger Discount For Political Risk

The decline could roll on, of course. That’s a distinct possibility, in part because there’s no quick resolution on the horizon for what’s shaping up to be a major political crisis.

“Calls for President Trump to be impeached are growing louder and that has created a long overdue sense of fear in markets,” says Jasper Lawler at London Capital Group.

The latest twist to the Trump saga is the appointment of a special prosecutor – former FBI director Robert Mueller — to investigate any illegal connections between Russia and last year’s election. The outcome may or may not result in criminal charges, but the process isn’t going to be productive for the White House.

As Politico reminds, “Veterans of previous scandals from Whitewater on say that kind of scrutiny can exact a toll even on a well-functioning White House—which Trump’s, consumed as it is by constant infighting and drama, isn’t.”

“There’s always a mood in a White House. If you have a special prosecutor, that can dampen the spirit. It just changes things. It makes life more complicated for people who are completely innocent,” said Peter Wehner, a former senior aide to President George W. Bush during the investigation into the leak of CIA agent Valerie Plame’s identity.

As for the stock market, the crowd was arguably looking for an excuse to sell. US equities have looked frothy in recent months (see here, for instance). Yet the rising political disorder in Washington in following Trump’s inauguration in January had little if any effect on investor sentiment overall. But a tipping point was reached yesterday, or so it appears.

It’s anyone’s guess if the market will continue to correct. Perhaps the key factor is how the political crisis unfolds in the days and weeks ahead.

Meantime, Mr. Market is demanding a bigger discount for political risk. The S&P, even after yesterday’s selloff, is still close to a record high and Trump is still Trump. Political uncertainty, in short, remains elevated. Ditto for the stock market. That’s not exactly a comforting combination.

The good news is that recession risk is still low and the prospects look encouraging for a rebound in GDP growth in the second quarter after a weak gain in Q1. Wall Street economists, for instance, are projecting that output will accelerate to a 3.4% advance from a tepid 0.7% rise in the first three months of the year, based on the median forecast via CNBC’s Rapid Update survey for May 16.

The positive macro outlook implies that any stock market correction will be a buying opportunity rather than the start of a bear market. The wild card, of course, is Donald J. Trump. Given his history, it’s safe to say that the potential for surprise remains high no matter what the numbers say.

That’s been true from day one, of course, with Trump. The only difference now is that the stock market demands a bigger margin of comfort (i.e., a higher expected return by way of lower current prices) as compensation for the extra political risk. The big mystery: What constitutes a fair price given the current state of affairs in Washington?

Unfortunately, there’s no model or political precedent that can provide clarity at this point. To use the technical explanation, we’re wingin’ it until further notice.

James Picerno
James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers. Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg Markets, Mutual Funds, Modern Maturity, Investment Advisor, Reuters, and his popular finance blog, The CapitalSpectator.

Leave a Reply

Your email address will not be published. Required fields are marked *