Markets

4 Reasons Investors Need Not Worry About the Trump Probes

Watch the economic numbers, not the politicians.

It’s now clear that the investigation into the Trump campaign’s ties to Russia is a serious one that won’t end quickly. What’s still uncertain is the impact that will have on the stock market.

After mostly rallying since Donald Trump’s election victory in November, the Dow Jones industrial average tumbled 373 points on May 17 as more questions swirled around the White House. The rout followed reports that Trump had urged James Comey, who Trump later fired as FBI director, to shut down a probe into Russian ties to Michael Flynn, Trump’s former national security adviser. Later that evening, news broke that the Justice Department had appointed a special counsel to oversee the investigation into Russian ties to the Trump campaign.

Although stocks rebounded in subsequent days, investors are increasingly nervous that Trump will at best be unable to enact much of his pro-business agenda and at worst be impeached. Some of my clients are among those worrying.

Those of us with a little gray in our hair recall the 1973-74 Watergate scandal unfolding drip by drip until Richard Nixon resigned amid what was until then the worst bear market since the Great Depression.

No one knows how the Trump investigation will wind up, but I think investors would be wise not to be too concerned about it. Here are four reasons why.

Economics matter much more than politics to the stock market. Trump’s tweets and travails get all the media attention. But far more important to stocks are dry economic numbers. Just last week, the Conference Board reported that its index of leading economic indicators rose for the eighth consecutive month, and the National Association of Homebuilders said its Housing Market Index showed that homebuilder confidence is growing.

More broadly, major economies around the world are expanding. For the first time since 2010, Europe, Asia and the U.S. are all growing. In the U.S., corporate earnings are trending higher, unemployment and inflation are low, and investors, while generally optimistic, are nowhere near the kind of euphoric mood you typically expect around major market tops. In addition, the market remains internally strong, with lots of stocks advancing and reaching new highs.

Trump may find his footing. I can’t recall a presidency that began as tumultuously as Trump’s. I don’t think there has been one this rocky in at least 100 years. But I covered Bill Clinton’s first year in office, 1993, and it was hardly a cakewalk. White House deputy counsel Vincent Foster committed suicide, touching off endless conspiracy theories that continue to this day. Clinton kicked a hornet’s nest by announcing that gays would be allowed in the military as long as they kept quiet about it. He drew criticism for firing White House travel office staffers and replacing them with friends. Probably worst of all, he put Hillary Clinton in charge of health care reform. She refused to share her team’s deliberations with Congress; Congress responded by killing reform. Yet Clinton recovered and presided over an almost uninterrupted economic expansion. He won re-election handily, and the stock market performed well during his presidency.

Trump’s administration may yet be able to settle down to business, if he can remain calm, and focused. During the general election campaign, Kellyanne Conway, Trump’s third campaign manager, was seemingly able to bring order to the enterprise. Trump tweeted less and stayed on message more as Election Day neared. Many presidents grow in the job; Trump may surprise us.

Impeachment is unlikely. No U.S. president has ever been impeached and thrown out of office. Andrew Johnson and Bill Clinton were both impeached, but they were acquitted in the Senate, where a two-thirds majority is required for conviction. Richard Nixon escaped impeachment and conviction only by resigning office. But Democrats controlled the House and the Senate during Nixon’s presidency, while both houses are Republican-controlled today. Trump is likely to take some hard knocks when Comey testifies publicly before Congress, and no one can tell where the investigations will end up. But the odds currently favor Trump.

There’s a backup plan if Trump leaves office. Vice President Mike Pence shares most of Trump’s pro-business, low-tax, anti-regulation agenda. He’s just quieter about it. You could even make the case that a pro-business agenda with a more conventional politician at the helm would be good for the stock market. After all, Congress so far has enacted almost none of Trump’s proposals.

It’s tempting to look at Watergate as a predictor of how the stock market would behave if Trump is impeached. Standard & Poor’s 500-stock index plunged 48% during the 1973-74 bear market. But that period also included rising unemployment and inflation, wage and price controls, and probably most important, the Arab oil embargo. The economy was in a deep recession—which, without question, hurt Nixon’s efforts to remain in office.

The better comparison might be to Clinton’s impeachment for lying about his affair with White House intern Monica Lewinsky. The S&P 500 fell 19% in July and August 1998 as Clinton testified before a grand jury. The market rallied, then it fell back in October 1998 as the House started the impeachment process. But by November, the market moved to fresh highs, buoyed by the belief that Clinton would be acquitted in the Senate, which he was in February 1999.

Steve Goldberg is an investment adviser in the Washington, D.C., area.

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