Neither Comey Nor U.K. Vote Ruffles Markets


Politics dominated the news this week from Washington to London, but Rip van Wall Street might as well have slept through it all.

In some of the most dramatic Congressional testimony in years, fired FBI Director James Comey told a Senate Intelligence Committee hearing that President Donald Trump had lied and tried to defame him and the Bureau.

Comey also laid out some facts about their encounters that could constitute obstruction of justice of the investigation of connections between the Trump campaign and the Russian government. (He said the president himself wasn’t under investigation, which Trump later tweeted was “total and complete vindication.”)

Meanwhile, across the pond, the Conservative Party lost its parliamentary majority as the opposition Labour Party picked up 31 seats in the House of Commons. That left Prime Minister Theresa May, who called the snap election to get a bigger working majority, scrambling to form a government as the U.K. prepares to enter “Brexit” negotiations with the European Union.

And how did the markets react to all this “turmoil”? As of late Friday afternoon, the Dow Jones Industrial Average traded at new all-time highs, but the Nasdaq Composite index sold off big on heavy profit taking.

So, do these big political events matter?

Well, not in the short run.

Right now, markets want to go up—or, more accurately, investors want to buy stocks, pushing markets higher. It’s been that way since the election, with some shifts of leadership from energy and financials early on, as Wall Street bet on a deregulatory “Trump trade,” back to the big  recent winners, the FAANGs (Facebook, Amazon, Apple, Netflix, and Google, or Alphabet), whose shares tumbled Friday.

Good earnings have a lot to do with it (the first quarter was the best in nearly five years); interest rates are still low, even though the Federal Reserve has started to gradually raise them, and we have modest GDP growth and close to full employment. Valuations—the S&P trades at about 17.6x 2017 projected earnings—are high but not exorbitant.

(The British election results have hurt U.K. stocks and the pound, but I don’t expect it to affect either continental European markets, which have priced in a Brexit, or the U.S.)

So, what’s not to like?

I think a lot of the animal spirits driving stocks derive from hope for faster economic growth under new Trump Administration policies. That’s where Comey comes in. Politico’s astute Congressional reporters warn us not to underestimate how much the various Russia probes are weakening the president and his agenda.

“Senate Republicans are plodding their way through health care reform with no definite deal in sight,” they write, while they’re trimming their sails on tax reform.  “Instead, most are eyeing a simpler and smaller tax cut as a more realistic option.”

If that even happens, it would be disappointing to businesses and the markets. I  don’t know if it would lead to a bear market, but I do know that with the CBOE Volatility index (VIX) near all-time lows, investors are pretty blasé about it. Such complacency rarely ends well.