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If Trump Falls, Stocks Would Rebound Under Pence

posted onMay 21, 2017
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Wall Street investors think it’s unlikely President Trump will be impeached, step down or be forced out of the White House. But if any of that happens they say the market would recover from the initial shock and could even benefit if Vice President Mike Pence takes over and pushes forward with the Republican’s economic agenda.

The controversies engulfing Trump include allegations that he tried to shut down an FBI investigation of a former adviser and a Justice Department probe into possible collusion between his campaign associates and Russia during the presidential campaign. And that has Wall Street handicapping whether Trump will survive his term and what his departure would mean for the stock market and the economy. While most Wall Street pros don’t think fellow Republicans will turn against the president and vote to impeach or convict him, they’re not ruling out anything just yet.

“In this climate of a bombshell every day, it’s not 100% certain Trump will survive,” said Greg Valliere, chief global strategist at Horizon Investments.

If the president doesn’t survive, would markets crumble under the weight of turmoil and uncertainty — or would a new bullish story line emerge?

The answer would depend on the timing of a Trump departure, who'd succeed him and the effect a power transfer would have on the economy and the president’s business-focused agenda, according to a dozen Wall Street pros interviewed by USA TODAY.

The general consensus is that markets would be able to weather any short-term turbulence. That's mainly because the Republicans still control both chambers of Congress and have a vested interest in pushing through what Wall Street perceives as Trump’s growth-friendly plan of large tax cuts for corporations, a dialing back of regulations and sizable spending to upgrade the nation’s aging infrastructure. An initial stock selloff, investment pros say, would likely be followed by a recovery.

The Dow Jones industrial average, which the past two trading days has recouped nearly half of the 373-point drop it suffered Wednesday after Trump-inspired political turmoil, is still supported by an improving U.S. economy and strong corporate profits. The economy is on track to grow by 2.6% in the second quarter vs. growth of less than 1% in the first three months of the year, according to Barclays. And first-quarter earnings growth for companies in the Standard & Poor’s 500 stock index is on pace to rise 15.2%, its best performance since late 2011.

Here’s how an abrupt Trump exit from the nation’s political scene would affect markets and the thinking of investors:

* Timing is everything. Political angst is high at the moment, and if Trump were to resign or be removed from office in the next few months, the immediate reaction of investors would be to avoid risk by selling stocks. That would cause a market decline of around 5%, said Jamie Cox, managing director of Harris Financial Group. “Markets,” he said, “would react violently.”

The market, however, could suffer an even larger and “more-prolonged” decline if Trump’s removal occurs closer to the 2018 mid-term elections. In that case, Republicans would be at risk of losing their majority in the Senate, Cox predicted. “The balance of power in government would likely tilt in the Senate to the Democrats,” he said. “The gridlock that would ensue would cause a more prolonged negative stock market response, say a 15% market decline.”

* Pence “Pop” possible. The main road to a market recovery travels through Vice President Mike Pence, most Wall Street pros say. Pence, according to Valliere, is the “anti-Trump,” an experienced, well-liked politician who is a “free trader, reliably pro-business, a former budget-cutting governor and a tax cutter.”

A Pence presidency would be characterized by “less drama.” He is viewed as a more conventional politician, someone who is seen as being able to stabilize the White House and reduce the uncertainty that market participants despise. More important, Pence could get things done.

“I think the markets would react positively to the prospect of a Mike Pence presidency,” said Valliere. “Pence is more popular than Trump on Capitol Hill. In fact, I think Pence would have a better chance of getting Trump's agenda enacted than Trump himself.”

The Republicans have a strong incentive to move forward with the president’s agenda with or without him, added Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners.

“Many will be voted out of office if they don’t fulfill their campaign promises, which is why the loss of Trump as president need not derail the market for an extended period of time,” said Zaccarelli, who warns the stock market could suffer an initial drop of 5% to 10% if Trump is out of a job in the next few months.

* Economic fallout. Political chaos doesn’t necessarily have to lead to economic chaos. Wall Street will quickly analyze what the financial fallout would be if a Trump departure bombshell were to hit. The answer will determine the direction of financial markets.

“Despite short-term market reverberations it always comes back to, 'Does this change the outlook for the economy and corporate profits?,'” said Lisa Kopp, head of the traditional investments group at U.S. Bank Wealth Management.