Calculating the Cost of Trump Turmoil in a Market Pushed to Brink

(Bloomberg) -- From rising interest rates to stretched valuations and tariff wars -- the things investors once had patience for, they no longer do.

And some argue, the same could be said for the market’s tolerance for the political drama surrounding Donald Trump’s presidency, which in recent days has become all the more acute. At a time when jitters over the economy and earnings are already running high, Trump’s travails are only serving to create more doubts among investors.

“That cloud of uncertainty becomes bigger,” said Joseph LaVorgna, chief economist for the Americas at Natixis. “What we see now is a world where you have concerns about the economy slowing, and then overlaid with this is what happens with the new Congress, possible investigations as it relates to the White House.”

Take today’s session, one that saw blowout retail sales and factory data, the lifting of auto duties by China -- and the biggest decline for stocks in a week. That the day’s news flow also continued the drumbeat of headlines damaging to the president struck a few analysts as not irrelevant to markets.

Calculating the Cost of Trump Turmoil in a Market Pushed to Brink

Even as the U.S. and China have taken positive steps on trade in recent weeks, amplified political woes surrounding Trump mean Wall Street can no longer ignore what’s happening in Washington, especially as investors also keep an eye on a partially inverted yield curve and weakening global economic data.

“It just adds to the noise, adds to the confusion, that uncertainty increases risk premium, so you’re going to see equities remain more volatile,” said LaVorgna. “You’re going to see the yield curve remain flat because investors are going to put money into fixed income assets as a safe haven -- that’s what we’ve been seeing.”

Against the existing political backdrop, markets have largely ignored drama from Washington, even as headline risk from Special Counsel Robert Mueller’s investigation remains high. But history shows that political scandal can fester a while before landing on markets with a thud.

Following Richard Nixon’s 1972 re-election, the S&P 500 gained 6 percent through the highs in January of 1973. It wasn’t until later that year that the markets slipped into a bear market, though that also coincided with the Arab oil embargo. In 1998, the gauge stumbled in the lead-up to Bill Clinton’s impeachment, but then rallied until the dot-com bubble burst.

Signs are mounting that the market sugar high with the current president may be wearing off. The S&P 500 hasn’t been able to gain its footing since September, lurching from one painful rout to the other. The recent selling has seen more than $2.5 trillion wiped from equity values. All told, the index is down more than 10 percent from its record.

And the political peril is mounting such that online betting site PredictIt now has the odds that the House of Representatives passes articles of impeachment against the president approaching a coin flip.

Calculating the Cost of Trump Turmoil in a Market Pushed to Brink

“The lately developing political and legal trouble that the White House has is certainly weighing on markets,” Rich Sega, global chief investment strategist at Conning, said in an interview. “There’s a lot of body blows that the market’s been absorbing lately with trade and concerns about the yield curve and all that -- and this is another one. It’s a lot to take and it’s reflected in volatility levels.”

To be sure, it’s not that everyone sees an imminent threat to markets should the investigations continue. According to Tom Essaye, a former Merrill Lynch trader who founded “The Sevens Report” market newsletter, markets only care about policy, so unless the proceedings affect tax or trade legislation, fallout should be contained. But should Trump’s legal dramas stay unresolved through the summer of 2019 -- leading up to the 2020 election -- they could become independent, material headwinds for equities.

“If Trump is still mired in controversy (or worse) then markets will begin to discount a potential Democrat win in 2020, which could endanger the tax cuts,” Essaye wrote to clients Friday. “That’s a pretty far off event, but I did want to put it out there for future reference.”

©2018 Bloomberg L.P.