How seriously should people take U.S. President Donald Trump’s claim that stocks would crash if he were kicked out of office? As you mull an answer, consider what someone in the other party would say.
Maybe there’s a less subjective way to judge – with earnings estimates, perhaps, which have changed a lot during his presidency. Or maybe valuation. Neither is perfect, but nor is any quest for science in the stock market.
Before digging in, acknowledge that stocks have enjoyed unusually strong gains since election day, with the S&P 500 rising at an annualized rate of 20 per cent, crushing the historical return of 9.4 per cent since 1927. At the same time, note the Trump return is only about one-percentage-point higher than the yearly gain since March, 2009, an era mostly overseen by former U.S. president Barack Obama.
Changes in earnings forecasts under Mr. Trump have been stark, compared with history. Last December, analysts were predicting S&P 500 earnings of about US$146 a share for 2018, forecasts that, thanks largely to the President’s tax cuts, soared over the next two months, rising four times as fast as any period Bloomberg tracks. And companies made good: S&P 500 operating income jumped 24 per cent in each of the past two quarters, and analysts see combined EPS of US$159 a share for all of this year.
Predictions for 2019 profit also soared, going from US$163 a share at the start of the year to US$177 a share now, an upward revision that dwarfs any since at least 2012. Add to that a small bump in valuations: the S&P 500 fetched 20.07 times annual earnings on election day 2016, and 20.7 times now.
So say what you will about intangibles, if you believe corporate earnings and valuation call the stock market’s tune, it’s hard to say the equity market doesn’t owe at least some of its altitude to the President.
Still, looking at earnings in isolation ignores a dozen other factors in speculating on how impeachment would affect stocks, from policy to sentiment to potentially catastrophic consequences for the country’s social fabric. Any one of those could easily eclipse anything having to do with corporate profits. But without an obvious framework for gauging those outcomes, the income lens is what’s left.
In examining Mr. Trump’s claim about a crash, investors might reasonably ask how much of the policy benefit would be rolled back if his presidency were threatened. Analysts were mostly skeptical the President is in any real danger, and not sure there’d be any major impact should he be.
Kristina Hooper, chief global market strategist at Invesco Ltd.
“First of all, it is very unlikely that President Trump would be impeached. If an impeachment did happen, we’d experience volatility and perhaps a significant selloff, but I believe any such market moves would be short-term in nature. There are two reasons why: 1) We have already gotten the best of his agenda – tax reform and deregulation. Other elements of his agenda which he is currently pursuing, particularly his trade policies, are not supportive of growth and actually worry many business leaders. 2) Tax reform is the gift that keeps on giving. It will add to GDP growth for years to come – in fact, the CBO [Congressional Budget Office] projects it will have an increasingly positive impact on GDP growth in the next several years. Also, if he were to be impeached, Mike Pence would assume the mantle and he has a strong track record of stimulating growth in Indiana. We can’t forget that the stock market is surprisingly resilient when monetary policy is accommodative, and it arguably is still accommodative.”
Craig Erlam, senior market analyst at Oanda Corp. in London
“The market isn’t hinging on anything substantial that hasn’t already been carried through. The markets have largely rallied on tax reform and we’ve seen that reflected in company earnings. But if there’s political instability and the U.S. economic growth slowed significantly, that would have global implications.”
Greg Valliere, chief global strategist at Horizon Investments LLC
“The economy, amped up on stimulus, is growing by close to 4 per cent, and unemployment is below 4 per cent. If the trade wars cool off a little this fall, we still think stocks can grind higher. It’s not a pretty picture here in Washington, but as long as Trump doesn’t go totally off the rails, investors can compartmentalize. With two more Trump associates now facing jail time, chances have improved that the House will flip back to the Democrats, who in private concede that an impeachment debate probably will begin by late winter. But we’re sticking with our call – while the House might indict Trump, Senate conviction still looks unlikely, unless there’s a major change in the second point.”
Past instances of presidential turmoil showed contrasting stock returns. In February, 1974, when Congress initiated impeachment proceedings against president Richard Nixon, the market was in the midst of a 1973-74 bear market that was punctuated by an oil crisis and an implosion of the world’s foreign change-rate system. The S&P 500 tumbled more than 30 per cent through October that year.
In December, 1998, when the House voted to impeach president Bill Clinton, stocks kept rising during the last stage of the internet boom. The S&P 500 climbed for five straight months until Mr. Clinton’s acquittal in February, 1999.
The S&P 500 was virtually unchanged as of 9:45 a.m. in New York, and the index barely budged Wednesday in the aftermath of convictions of the Trump associates that sparked renewed discussion of a potential impeachment.
“Equity markets don’t seem to care, and we think they are right,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note. “Rates are low, the dollar is strong and corporate earnings remain robust. Those are the only things stock prices can (and should) actually discount.”