Did Anything Change?

No one can deny that this year has seen its fair share of market volatility. February was the most volatile month we have seen since 1996, ¹ and by the end of May, 2018 would have ranked as the 12th most volatile year out of the last half-century. ² While the volatility we’re experiencing is not an anomaly, it’s safe to say that our current political climate can play a part in the market’s ups and downs. The question is, how much impact do these events have on the markets?

What’s Happening Now?

Two recent political situations have caused a few bad weeks for President Trump. First, Paul Manafort, Trump’s former campaign chairman, was convicted of eight counts of tax and bank fraud. Second, Michael Cohen, Trump’s personal lawyer, pled guilty to multiple counts of tax evasion, bank fraud, and violating campaign finance law. The markets don’t like uncertainty, so we might assume that this news would upset the balance.

So far, that hasn’t happened. In the near term, the markets have taken this in stride. All major indices were positive and near new highs when these events occurred. The S&P 500 even reached a new intraday high. ³ Stocks were only slightly lower on the morning following the news, which is not all that unusual when stocks have advanced nearly unchecked for the better part of two weeks.

What To Expect

Regarding the president's issues in terms of the impact on stocks, much will hinge on what the news flow looks like in the coming days. If the news looks like it's starting to affect the economy, then there is a higher probability that markets will wobble. If these scandals morph into a full-blown political crisis, we might see something similar to Watergate. In that case, it took months for the situation to play out and the lengthened timeline put pressure on the markets.

On the other hand, if no new information is revealed, especially in the Michael Cohen case, these events could fade into the background. They won't go away completely, but they will likely be just one more data point investors factor in when valuing stocks and the markets. As with most things, only time will tell. 

What This Means For President Trump

Of the two breaking news stories, it’s the Cohen situation that seems the most damning for the president. Cohen implicated the president in his guilty plea in that he suppressed 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. Nevertheless, here in the United States, we are all innocent until proven guilty in a court of law. We also need to remember that in terms of Cohen’s guilty plea, it is Cohen's word against Trump’s. It is now up to the investigators to find evidence to back up what Cohen is alleging, and circumstantially, it would seem that the evidence is out there.

If the evidence continues to mount against the President, then investors will most likely start to look beyond a Trump presidency. If at some point the President either resigns or is impeached, then Mike Pence will become president. While the tone in Washington under a President Pence would be a bit more polite, the economic policies that President Trump ushered in, such as lower taxes and fewer regulations on businesses, will not go away. Economic policies that are in progress might be put on hold, but the overall pro-business environment of the current administration will still be in play. There is a school of thought that believes 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 from the president's Twitter account each day. Markets ultimately follow earnings and so far there seems to be nothing that a possible change in administration would do to impact either earnings or economic growth.

What About The Democrats?

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 election wave has been building for months, and it seems that the news about Cohen and Manafort just adds fuel to the fire. The next question is whether or not the Democrats can also take hold of the Senate as well, which could stifle further Republican economic initiatives until after the 2020 election. Markets could potentially view both the House and Senate controlled by the Democrats as a negative for stocks, but these events are still months away, and we’ll cross that bridge when we get to it.

Separate Emotions From The Economy

Finally, whatever you personally think about President Trump, be sure to separate those feelings from what’s going on with the economy. You do not have to approve of the president or his policies to recognize that the economy is doing well right now and the markets have enjoyed a substantial upward trend since he was elected in 2016. The current administration cannot take all the credit for this, as many of President Obama's policies helped set the stage for the current advance. Regardless, it has been the current administration's economic achievements that likely lit the flame for the incredible growth we've seen since November 2016. Money tends to go 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 really change. If the economy keeps humming along, the markets have the potential to trade higher over the next few years.

As much as we’d like to, we can’t predict what the markets will do, nor can we prepare for every possible economic situation. What you can do is create a portfolio that fits your unique risk/reward levels that will set you up to cope with the inevitable ups and downs of the market. Do you want to know if your portfolio is built to withstand whatever happens to our economy? Call my office at 708.488.0115 or email me at lumencapital@hotmail.com.

About Chris

Christopher R. English is the president and founder of Lumen Capital Management, LLC, a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.

---

¹ http://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-march-19-2018/

² http://flemingwatson.com/volatility/

³ https://www.cnbc.com/2018/08/21/us-markets-china-us-talks-jackson-hole-summit-on-the-agenda.html