Last Wednesday, Convergex's Chief Strategist Nick Colas pondered on this question, “What would US stocks do if President Trump resigned?”
Here are his thoughts:
Based on recent price action the answer is clear: rally 3-5%, at least, over a day or two. The reasoning here is simple. US equities see through the headlines (like the Comey firing) and essentially believe two things. First, corporate earnings are growing nicely. Second, the Republican-led Congress needs to pass tax reform by the 2018 midterm elections. As for who sits in the White House, markets will favor anyone who can push item #2 to a speedy conclusion while not screwing up #1. OK – one more (half a) thing: long term interest rates are going nowhere, fast. As long as markets believe those 2 ½ drivers remain in place, US stocks will (very) slowly grind higher. And it isn’t just the market’s response to Tuesday’s headlines that make us say that. Our monthly look at sector and asset price correlations supports the thesis. Average S&P large cap sector correlations dipped in the last month and are averaging just under 60% YTD. That’s a clean 20 points lower than the 2009 – 2016 experience and shows fundamentals now matter again. But you don’t need a “Trump” card to play this game.
First of all, I think this is just a fun thought exercise because I don't think there is any chance that President Trump will resign.
In terms of Colas' view, I agree and disagree. I believe that if the president did resign, it would be a one to two day sell off, not a 3-5% rally, because it would cause significant shock and uncertainty in the markets — two things that investors hate. Who wants to try and sort out the possibilities of a President Pence?
I do agree with Colas that strong earnings growth and low interest rates should continue to drive markets higher regardless of any political events. We were one of the first to pound the table last summer on a turn in corporate earnings and we continue to believe that growth trajectory should remain in place for the foreseeable future.
“Donald Trump” by Gage Skidmore is licensed under CC BY-SA 2.0
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