Did Anything Change?

I am breaking in today given the news that came out after the market's closed yesterday.  There is no doubt with the Paul Manafort convictions and the Michael Cohen plea deal that President Trump had a very bad day yesterday.  However, in the near term, the markets seemed to take this in stride.  All major indices were positive yesterday and all are near new highs.  The S&P 500 actually made a new intraday high.  Stocks are only slightly lower this am as I'm writing this and that's not that unusual when stocks have advanced nearly unchecked for the better part of two weeks.  Here are my thoughts.

First as to the markets, we will need to see how stocks take this news over the next few weeks.  I think in terms of impact much will hinge on what the news flow looks like in the coming days.  If the news looks like it's starting to impact the economy then there is a higher probability that markets will wobble.  If this morphs into a full blown political crisis, something similar to Watergate that takes months to play out, then there is a higher probability that stocks will be under pressure.  If there's not much else that comes forward, especially if we don't hear much out of Michael Cohen in the next few weeks,  then I think we'll see this fold into the background.  It won't go away but will likely be just one more data point investors factor in when valuing stocks and the markets.  Only time will tell on this.

Of the two stories it was the Cohen news that was seemingly the most damning for the President yesterday.  Cohen implicated the President in his guilty plea in terms of suppressing information that would have been harmful to the President's political prospects going into the 2016 elections.  Cohen's admissions in his guilty plea can be carried into court even if Cohen is never called as a witness. Never-the-less here in the United States we are all innocent until proven guilty in a court of law.  Also in terms of the Cohen court appearance we need to remember that in terms of the plea it is Cohen's word against Mr. Trump.  It will be up to the investigators to flush out what Cohen is alleging with other evidence.  Circumstantially it would seem that perhaps that evidence is out there  As such investors will at least start to look beyond a Trump Presidency.  If at some point the President either resigns or is impeached then Mike Pence will become President.  The tone in Washington under a President Pence would be a bit more polite but the economic policies that President Trump has ushered in, lower taxes and less regulation on business, will not go away.  Further economic policies might be put on hold but the overall pro-business environment of the current Administration will not go away.  There is a school of thought that certain policies favored by moderates on both sides of the aisle might have a better chance to see the light of day without the vitriol coming out of the President's twitter account each day.  Markets ultimately follow earnings and so far there seems to be nothing that a possible change in Administrations from Trump to Pence would do to impact either earnings or economic growth.

The one thing to watch now is the growing likelihood that the Democrats will regain control of the House of Representatives.  Evidence of a Democratic wave has been building for months.  It would seem that yesterday's news would add fuel to this fire.  Attention now may turn to whether or not the Democrats can flip the Senate.  Doing so could stifle further Republican economic initiatives until after the 2020 elections.  Markets might not take that news too well.  That, however, is something several months away at this point.

Finally, whatever one personally thinks about the President, I will say again please separate those feelings from the economy.  You do not have to approve of the President or his policies to take note  that the economy is doing well right now and the markets have enjoyed a substantial move higher since he was elected back in 2016.  The current Administration cannot take all the credit for this as many of President Obama's policies helped set the stage for this current advance.  But it has been this Administration's economic achievements that likely lit the flame for the monster mover we've seen since November, 2016.  Money goes where it is treated best.  If we are in the twilight of the Trump years but we stay in a Pro-business economic environment then nothing will have really changed and markets have the potential to trade higher over the course of the next few years as long as the economy keeps humming along.

I'll be back now on Friday.

*Long ETFs related to the S&P 500 in client and personal accounts.