How Politics is Impacting the Market—Update, July 12, 2017

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Politics interjected itself into the markets Tuesday, this time via a release of emails from Donald Trump Jr. regarding his meeting with Russian surrogates. But that wasn’t the only news out of Washington yesterday, as Senate Majority Leader McConnell has cut short the August recess to work on healthcare.

While those two issues dominate the media, the really important Washington-related events (from a market standpoint) continue to be largely ignored. So, I wanted to take a moment and provide a another Political Update.

Issue 1: Russia

Potential Market Impact: Not very big unless something substantial changes.

As has been the case for months, this topic dominated the headlines and drowned out almost everything else in the markets Tuesday.

But, as has also been the case, from a market standpoint the whole Russia subject remains much more of a media issue than a markets issue. I don’t say that to minimize any opinion you might have on the matter, but the fact is that until there is irrefutable evidence that Trump (or Trump’s team via direction from Trump) acted explicitly to interfere with the election outcome or break some other law, impeachment or removal of Trump remains an extremely remote possibility. Again, that’s because impeachment is a political, not a judicial, process, and it’ll take a lot for Republicans to impeach a sitting Republican President (and the same goes for Democrats).

Going forward, this Russia issue clearly isn’t going away as the Trump Jr. emails, while not directly incriminating, aren’t exactly exonerating, either. For now, any “Russia” dips should be bought.

Issue 2: Healthcare Bill

Potential Market Impact: Positive if the Healthcare Bill Fails

Looking elsewhere in Washington, Senate Majority Leader McConnell cancelled much of the Senate’s summer holiday when he delayed the start of August recess until August 14, giving our good public servants just three weeks off, as opposed to the normal five or six. The ostensible reason for the removal of the recess is to work on the healthcare bill, which at this point appears all but dead.

From a market standpoint, healthcare is only really important due to it’s effect on tax cuts. In many ways, markets want healthcare to fail, and fail quickly, so that Republicans can focus solely on tax cuts. To boot, if healthcare fails, it’s almost a certainty that Republicans will exit 2017 with almost no legislative accomplishments, so the pressure will be on to cut corporate taxes in 2018… especially given it’s an election year.

The bottom line with healthcare is this: Passage of an Obamacare repeal/replace bill still looks slim, but that’s ok for markets as long is it doesn’t endanger tax cuts in 2018. At this point, the sooner Republicans move on taxes, the better, so don’t be surprised by a relief rally if the healthcare bill officially fails in the Senate.

Issues 3 & 4: Debt Ceiling Extension & Government Shut-down

Potential Market Impact: Very negative.

The media is so myopically focused on Trump and healthcare that it’s largely ignoring the actual important, Washington-related events in 2017, which are the debt ceiling and government shutdown.

The debt ceiling must be extended by early October while the current government spending bill ends on Oct. 1 (if another spending bill isn’t passed, the government shuts down).

Now, the probability of either event happening is slim, because Republicans control Congress and the White House, and that would be the quintessential shooting of oneself in the foot. However, that doesn’t mean we won’t walk right up to the line again and give everyone a scare.

Bottom line, Washington remains much more bluster than bite for markets, but we are getting close to events that could actually move markets. Regardless of the headlines and sensationalism, the key is to look past the noise and stay focused on that debt ceiling and government shutdown in late-September/early October. That’s really when Washington might (rightly) begin to weigh on stocks.

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What Comey’s Firing Means for Markets, May 11, 2017

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Regardless of how the rest of the year turns out, I personally will always remember 2017 for the fact that I had to try and figure out the market implications of political events that I never thought I would have to worry about.

What Comey’s Firing Means for Markets.Case in point, Tuesday’s firing of FBI Director James Comey moved markets yesterday, and I wanted to cover what that means going forward (it’s a mild and potentially negative, but not a bearish game changer). Now, to be clear, the market is agnostic to the politics of this drama and as such so am I. Whether you or I think the firing was a coverup or justified, it matters not from a market standpoint, so as I always do with political coverage, I will strictly stick to market implications.

The reason Comey’s firing is a mild negative on markets is because it further undermines President Trump and the Republicans’ ability to pass their pro-growth agenda.

Case in point, just yesterday, we saw part of the fallout from the Comey firing as the Republicans were unable to pass a reversal of an Obama rule against methane gas capture on oil and natural gas wells (Republicans say the environmental regulation increases the cost to drill natural gas and oil wells).

Three Republicans; Graham, Collins and McCain, voted with the Democrats, and the repeal measure failed 49-51. Graham and Collins were always “no” votes on the rule, but McCain was expected to vote “yes”—so much so that Vice President Pence was in the Senate to cast the tie breaker. McCain didn’t say so explicitly, but his “no” vote is widely seen as a protest vote against Trump.

Bottom line, the controversy now surrounding Trump’s move to fire Comey is a political hot stove, and some Republicans are already distancing themselves from the President as they are already thinking about re-election. Point being, the path to passing meaningful tax reform or other pro-growth policies just got more difficult.

Now, the good news is that this isn’t a bearish game changer for markets in part because expectations for tax cuts in 2017 are already pretty low.

Still, there is risk here, because the market does still assume some corporate tax cuts/foreign profit repatriation in 2018. If Trump/Republicans lose enough political capital to put a corporate tax cut in 2018 in doubt, then that will be at least a modest negative on stocks.

More specifically, after June 2018 (at the latest), everything in Washington will stop as focus shifts to the mid-term elections. So, if the market begins to think there will be no corporate tax cuts and no foreign profit repatriation, then that will begin to weigh on stocks later in 2017/early in 2018.

Bottom line, unfortunately politics remains an important influence on markets in 2017. On balance, expectations have been tempered from a policy standpoint, but the “gap” between likely policy reality and policy expectations remains wide… and it got wider this week with the Comey controversy.

Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves.