– short-term risks, but five reasons for optimism

Introduction

Around May each year I normally get a bit wary about the risks of a pullback in shares. It seems the old saying “sell in May and go away…” is permanently stuck in my mind. And of course shares have had a great run since their global growth scare “bear market” lows in February last year to their recent highs with global shares up 31% and Australian shares up 25%, and both saw good gains year to date to their recent highs of 7% and 5% respectively. Meanwhile, although there have been several calls this year that the so-called “Trump trade” – anticipation of his pro-business policies that supposedly drove the surge in shares since the US election – is over, the risks have intensified lately given the issues around Trump, the FBI and Russia with some fearing the Trump trade is now set to reverse. This note looks at the main issues.

Trump trade or Trump bump

It’s now six months since Donald Trump was elected President of the US and four months since he was inaugurated. In many ways, it has gone better than feared: he has not withdrawn the US into isolationism, there has been no trade war with China, he has appeared more focussed on pro-business policies such as deregulation and tax reform than populist policies, and he appears far more supportive of the Federal Reserve under Janet Yellen than feared. But by the same token, many would see the events of the last two weeks – his firing of FBI director James Comey when it’s in the midst of looking into the links between Trump’s campaign and Russia, claims he may have attempted to influence the FBI to stop its investigation and reports he shared classified material with Russian officials all surrounded by a barrage of tweets and leaks – as confirming that his narcissism, short fuse, erratic nature and divisive approach render him unfit to be president. Comparisons to Nixon and talk of impeachment seem to be growing by the day.

In terms of investment markets, a common view seems to be that the “Trump trade” drove the surge in global share markets since the US election and that this will now reverse because of the political crises now surrounding Trump. However, this is too simplistic. First, the main reason for the rally in shares since last November has been the improvement in economic conditions and surging profits that has occurred globally and which had little to do with Trump. Second, unless things become terminal for Trump quickly the political crisis around him is more likely to speed up his pro-business reform agenda than slow or stop it. In this regard, the following are worth bearing in mind:

• The process to remove a president by impeachment is initiated by the US House of Representatives and can be for whatever reason the majority of the House decides and conviction, removal from office, is determined by the Senate and requires a two-thirds majority.ⁱ
• At present, Republicans control the House with a 21-seat majority and won’t vote for impeachment unless it’s clear that Trump committed a crime (and so far it isn’t obvious that he has) and/or support for him amongst Republican voters (currently over 80%) collapses.
• However, Trump’s overall poll support is so low that if it does not improve the Democrats will gain control of the House at the November 2018 mid-term elections and they will likely vote to impeach him (they will almost certainly find something to base it on much like the Republican Congress found reason to impeach President Clinton) and then it’s a question of whether Trump can get enough support amongst Republican Senators to head off a two-thirds Senate vote to remove him from office (as Clinton did).

In short, Republicans only have a window out to November next year to get through their pro-business reforms. And the more the politics around Trump worsens, the more they need a win. So if anything, the current mess speeds up the urgency to get tax and other pro-business reforms done because after the midterms they probably won’t be able to. On this front, work on tax reform is continuing and Trump’s infrastructure plan looks likely to be announced soon.

The impact of past impeachments on the US share market is mixed and proves little. The