Is the "Trump trade" toast? It remains to be seen whether scandal will prevent the president enacting his economic policies.by George Magnus / May 22, 2017 / Leave a comment
If you want to see how financial markets react to a political crisis, look at Brazil. Last Thursday, the Bovespa stock market index plunged 10 per cent as new developments in the corruption scandal around President Michel Temer increased the odds of his impeachment.
Apropos impeachment, the US S&P 500 index also had a wobble last Wednesday, falling by 1.8 per cent as Deputy Attorney General Rod Rosenstein announced a special counsel to take over the investigation into Russian interference in US politics.
But by Friday, the US market was barely lower than it had been before. The trade-weighted US dollar index, up 6 per cent early this year, is now back to where it was at the election. Does this suggest that the Trump trade—radical tax cuts and changes in tax reform, deregulation and infrastructure spending—might be toast?
What spooks financial markets is discontinuity. This is why they have come through many political shocks, such as 9/11, that had few enduring economic consequences.
But while the allegations against Donald Trump and his team, and the investigations, make for lively political coverage, will they lead to impeachment proceedings? And, in the meantime, will Washington be so preoccupied with the allegations and investigations that the legislative functions of the government are impaired—at least as far as the key planks of economic policy are concerned?
Comparisons with Watergate
Understandably, last week led many people to recall Watergate, when Washington was consumed by scandal and impeachment proceedings against Richard Nixon that ended with his resignation. During those years, the US stock market went through a brutal bear phase with the S&P index falling 50 per cent between the start of 1973 and Nixon’s resignation in August 1974.
But any lessons for today are highly tenuous. This was also a time that saw the quadrupling of oil prices, a deep recession in 1973-4 that pushed unemployment up to 9 per cent, and a surge in inflation from 3.6 per cent in January 1973 to 12 per cent by the end of 1974.
Today’s economic environment is much more benign, though the equity market is at an expensive level. Even though the economy grew by just 0.7 per cent at an annual rate in the first…