Wednesday, March 15, 2017

Sell Trump Short If Stocks Take A Dive

Market downturn could hit new administration hard.


By Chris Edelson and Erran Carmel
MarketWatch
March 15, 2017

Seasoned investors will tell you that you can’t time the market. Even a self-promoting braggart like Donald Trump would be cautious about market-timing or predicting a perpetual rally.

Yet the president has no qualms about claiming bragging rights for the U.S. stock market’s recent “Trump rally,” which has lifted the S&P 500 SPX, -0.34% the Dow Jones Industrial Average DJIA, -0.21% and the Nasdaq Composite COMP, -0.32% The danger for Trump here is that by claiming credit for the market’s strong performance when things are going well, he and his administration will be held accountable for a sharp market downturn.

Consider what events could bring the current rally to a halt, and the resulting political consequences for Trump. Will the inevitable market downturn be caused by a global shock? Domestic turmoil? Trump himself?

One market risk comes from Trump’s own volatility. To be sure, the market so far has discounted the risk of Trump’s erratic behavior (and bizarre tweets) during the Trump stock market rally; with volatility at historic lows.

Nevertheless, we have to consider that Trump could trigger market tremors when (not if) he spirals into another unhinged episode or when one of the many questions involving Trump and members of his administration — insider trading, conflicts of interest, dealings with Russia — becomes impactful.

In fact, Trump himself — quite inappropriately — predicted some possible global jolts in a press conference in February, any of which could roil world markets.

On the domestic front, markets could be negatively affected if Trump’s legislative agenda stalls. Investors are optimistic that Trump will deliver on tax cuts and deregulation. But, even with Republicans controlling both houses of Congress, Trump so far has been slow to show that he can advance any significant legislation. The uncertain fate of the new TrumpCare legislation is a good example. This bill includes huge tax cuts for the wealthy and also benefits insurers — promises that are helping drive the current market rally. What if the legislation fails to move ahead? What if Trump runs into trouble when it comes to other tax measures? (There is evidence that Republicans are divided on key issues here as well.)

The Federal Reserve’s expected interest rate hike may also turn stock prices south — though a rate increase has been anticipated.

It doesn’t matter whether the market goes down due to an exogenous shock or to the deliberate, careful moves of the Fed. The end effect will be to weaken Trump’s position — particularly with two key groups: business leaders and Republicans in Congress.

Business leaders might become more emboldened to take on Trump after the market weakens. Some CEOs already have criticized the new president, but most have been careful about voicing misgivings — so far. Meanwhile, those Republicans in Congress who are already concerned about Trump might stand up to the president— especially members of the House and senators facing re-election in 2018.

Of course, expecting people to confront this bully president is hardly a given. But we have already seen signs that business leaders and Republican members of Congress can break with the president under certain circumstances.

Other factors will pressure the president. Older Americans (a key part of Trump’s base) could see their nest-eggs shrink just as they hope to retire. Media coverage, already a source of constant irritation for Trump, could get even more unfavorable. As he is put on the defensive, Trump could further damage his standing with new shocking statements and actions. If Trump claims credit when the market is rising, he must also take the blame when it falls.

By tying political power to market gyrations, Trump is gambling. If Trump claims credit when the market is rising, he must also take the blame when it falls. Of course, since Trump never accepts blame for anything, he will, at the least, be deprived of a favorite talking point. He also could try to blame someone else if the high-performing market he inherited runs out of gas.

Either way, the consequences for his presidency could be serious. In the first days of Barack Obama’s presidency, politically conservative commentators gleefully exclaimed that each down day for the market was a vote of no-confidence against Obama. As it turned out, Obama presided over a long and lucrative market boom. Trump might find himself experiencing the reverse — early market gains followed by a steep slide, creating a market storm that leaves political damage in its wake.


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