Trump Risk Is Rising

 

For the last few weeks, in my MarketWatch column and GoldenEgg Investing®, I’ve been laying out why the risk of a stock market correction is rising.

It boils down to an overvalued market that’s overdue for a pullback and some key technical signs that have started to flash yellow. You can read my whole case here and here.

But another factor is getting more and more important: the erratic behavior of the president of the United States.

Markets generally don’t trade on politics; stocks thrived under presidents as diverse as Lyndon B. Johnson, Ronald Reagan and Bill Clinton. They did well in the early years of the George W. Bush administration only to tank later. They slumped in the first two months of the Obama presidency but then started a long bull market that has lasted until today despite tepid economic growth.

Truth is, stocks generally trade on interest rates and earnings growth. Period. Geopolitical crises may prompt panic selling, but stocks almost always wind up higher 12 months later. Investors usually don’t give a damn who’s in the White House.

But though I hesitate to write these words, this time may be different.

Why? Because the behavior of President Trump is so outside the norms that counting on “normal” things to happen in Washington—especially pro-business tax reform, which Wall Street still seems to expect–is setting investors up for a big disappointment.

We’ve already written about the president’s recklessness in dealing with North Korean president Kim Jong-un and how that’s raised the risk of war on the Korean peninsula, a war that, even if it didn’t go nuclear, could cause incalculable damage. Apparently Wall Street doesn’t know how to price in the risk of such a war or it has moved on. But that conflict won’t go away.

Lately the president has launched a Twitter war against senators and congressmen of his own party, especially Speaker of the House Paul Ryan (R-Wisc.) and Senate Majority Leader Mitch McConnell (R-Ky), with whom he reportedly isn’t speaking. President Trump also threatened to shut the government down if he doesn’t get U.S. taxpayer funding for his border wall, which he assured us repeatedly would be paid for by Mexico.

Problem is, when Congress returns from its recess next week, it will have only 12 legislative days to pass a new budget resolution, prevent a government shutdown, and raise the debt ceiling to prevent the U.S. from a default. Some of that will surely get kicked down the road—and I put the risk of default at only 10%–but with a flailing president spoiling for a fight with everybody, all bets are off.

GoldenEgg Investing® will not publish an update next Friday, Labor Day weekend, although paid subscribers will receive Special Alerts as market conditions warrant.

 

 

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