The Falling Market Is Not Doing So In A Political Vacuum

The Falling Market Is Not Doing So In A Political Vacuum

By

Leonard Zwelling

On Monday afternoon, February 5, I watched MSNBC as the Dow Jones Industrial Average dropped over 5%, well over 1000 points. (It finished down 4.62%). A series of experts is parading in front of the cameras to explain the fall which is adversely affecting the rest of the market as well as the DJI. I actually think it’s simple. It’s Trump.

The president has frequently taken credit for the huge expansion of the value of the markets. He has to take the blame for the fall. My guess is that there is some shakiness on the parts of some of the bigger investment players with Trump’s long-term presence in the White House. And there should be.

It now seems virtually impossible for Mr. Trump to fire Rod Rosenstein who he could replace with a more compliant Deputy Attorney General who would fire Mueller. The Nunes memo is not going to be sufficient grounds for the dismissal of the Assistant Attorney General who is Bob Mueller’s boss. The president could still replace Jeff Sessions, the recused from Russia probe Attorney General with Trey Gowdy, who would not be recused from the Russia probe and who in turn could fire Mueller. This might all take time and would be political blood sport. It is very unclear that Trump wants to take on this battle and the smart money may be figuring that Trump is a short-term Oval Office occupant and therefore is selling some of its equity.

It also may be that the big boys on Wall Street have decided that Trump will never get anything done beyond Neil Gorsuch and the Tax Bill. My guess is that the smart money is now convinced that we are going to be going through a period of political turmoil, much like Watergate, and that the inevitable outcome, Trump’s resignation, is still months away. The underlying economy (unemployment is down, inflation is not a real threat yet, the GDP is constant at just under 3%) seems relatively good and this market drop could just be profit taking among the large institutional players. It is hard to attribute this drop to economic factors. Political ones? Perhaps.

In business school we were taught that the price of a stock is the net present value of future earnings of the company. That’s in theory. In fact, emotions play a role and the market is way up from over a year ago. It is logical to view the market as overvalued. It is also logical to think that the Trump doctrine of America First and withdrawal from international agreements as well as the president’s constant lying and name calling of Congress people has turned off investors both at home and abroad. The chickens may be coming home to roost. By contrast, by the time you read this the market may be at 30,000. Who knows?

And that’s the point.

The stock market, and surely the average of 30 stocks, is not the whole of the American economy. Nonetheless, the market is sensitive to factors like confidence in the stability of the government. Maybe the market just is detecting uncertainty and if there is one thing the market is certain to hate it is uncertainty.

This drop is not just profit taking. We shall see if it is a major correction. It’s not nothing, but what it is, remains to be seen.

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