When Politics Does and Doesn’t Matter


The political world is agog over the fallout from President Donald Trump’s firing of FBI Director James Comey. But investors? Not so much.

The event and the constantly changing rationales coming from the White House are making cable news executives smile. Neither conservative Fox News nor progressive MSNBC nor center-left CNN are having problems filling air time—or, as they say in the trade, feeding the beast. And it’s been driving ratings to the sky.

Even print media stalwarts, who now claim to be “digital first,” like The New York Times, Washington Post, and Wall Street Journal are racking up good old-fashioned scoops and boosting subscriptions by the most in years.

But Wall Street is keeping its cool. Over the last three weeks the Dow Jones Industrial Average has been stuck within a 125-point trading range, while the Standard & Poor’s 500 index hasn’t swung more than 25 points either way.

Meanwhile the CBOE Volatility index (VIX), which people call Wall Street’s “fear index” but I think is more accurately its complacency index, has ticked up from a 24-year closing low of 9.77 Monday to 10.72 late Friday. Still, that’s way below where  it’s been for most of the year and suggests nervous jitters rather than real fear.

So, if the Comey Affair doesn’t matter to markets—yet– what does?

Well, the usual suspects: interest rates and earnings, with a pinch of tax reform.

As we’ve often written, the Federal Reserve is on a steady course to raise the federal funds rate by ¼ point three times this year and maybe start winding down the $4.5 trillion on its balance sheet. Unless we see signs of overheating or a sudden weakening, that policy will remain in place.

And first-quarter earnings have been, in a word, terrific. As of last week, according to FactSet, 75% of S&P 500 companies that have reported thus far have beaten Wall Street’s earnings estimates and 66% have topped sales forecasts.

The prospect of tax reform, especially tax cuts for businesses, has been the driving political force behind the Trump rally, which petered out only when it became clear that repealing and replacing the Affordable Care Act would delay tax reform. Keeping the government open and raising the debt limit aren’t slam dunks, either. The Senate also will have to confirm a replacement for Comey, which will eat up scarce legislative time.

But by sidestepping the Comey conflict, House Speaker Paul Ryan (R-Wis.) and Senate Majority Leader Mitch McConnell (R-Ky.) are telling the markets that tax cuts and tax reform are the whole ballgame. As long as traders and investors believe them, stocks will stay high or move higher. But if they stop believing, look out below.