Well, that didn’t last long, did it?
Just last week investors didn’t have a care in the world, despite what in retrospect was a gathering storm around President Trump’s firing of FBI Director James Comey.
The CBOE Volatility index (VIX), dubbed Wall Street’s fear index but which I call its complacency index, didn’t move up much from its 24-year low of 9.77 last Monday. “So, if the Comey Affair doesn’t matter to markets—yet—what does?” I wrote.
That “yet” should have been in capital letters, because after the blockbuster report in The New York Times that Comey had a memo saying the president had asked him to end the FBI’s investigation of ties between Russia and the Trump campaign, markets were gripped by a mini-panic.
On Wednesday, the Dow Jones Industrial Average plunged 372 points, the Standard & Poor’s 500 index slid 1.8%, and the VIX spiked 50% in a single day, to close at 15.59. That same evening, Deputy Attorney General Rod Rosenstein named former FBI Director Robert Mueller special counsel for the Russia investigation.
That’s calmed jittery markets (the VIX was trading near 12 Friday), but was it really back to normal again?
Yes in the short run, no over the long haul.
Mueller is an experienced prosecutor with a sterling reputation and the same subpoena power and ability to convene grand juries and try cases as U.S. attorneys. I’m sure he’ll go step by step to build criminal cases against those who may have broken the law.
He’ll also have first dibs on witnesses, and that is likely to conflict with congressional committees’ desire for headlines and sound bites. Few potential witnesses (like fired National Security Advisor Michael Flynn) will risk self-incrimination by testifying openly to House or Senate hearings.
That will most likely keep a lot of details under wraps (Comey, who has no exposure to criminal charges, will probably be the exception) and take the wind out of the sails of Democrats pressing for televised hearings, a la Watergate. It also may give House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell some breathing room to move tax reform forward. On Thursday Ryan said tax reform would happen in 2017. So, the ever-hopeful Trump trade resumed.
But as Mueller does his work, the drip, drip, drip of leaked revelations and news of one indictment after another will grind this administration to a halt, just as Watergate did for President Nixon. I believe that will peak by next summer, just before the midterm elections, when the market effect of whatever Trump has achieved will have played out.
So, although the fever has broken, the chronic illness will drag on. That’s why for the next few months, cautious optimism is justified–but not complacency.