So there are two ways to look at the turmoil unfolding inside the Beltway if you’re an investor. Neither of which bodes particularly well.
- …think the worst that can happen here is that the ongoing Russia probe serves to distract the White House and lawmakers alike, thus further delaying the implementation of Trump’s growth-friendly policy platform
- …think that this will ultimately crash and burn in spectacular fashion leading to Trump’s ouster from the Oval Office
In the former case, a hamstrung Washington can’t move ahead and thus trades tied to the reflation meme are (further) imperiled. In the latter case, they’ll probably be some “day of ultimate reckoning” for risk assets and everything that entails.
For those who are inclined to believe the latter narrative, you’re encouraged to check out “Trump ‘Squeezing Lemon Juice Into Cuts With Every Tweet’ – And Other Zingers From Analysts.”
If, however, you’re inclined to take the (relatively) more sanguine view that the only thing at risk here is the reflation story (and not the foundation of American democracy), you might find the following from BofAML to be a more worthwhile assessment of what’s taking place and what to expect going forward.
Political uncertainty vs. tax reform
In a democracy like the US the main impact of elevated political uncertainty is higher risk of inaction, which for financial markets presently translates to the possibility of further delays to/lower likelihood of fiscal policy easing – especially tax reform.
This is one reason investors increasingly fear that the expected acceleration of economic growth forming the basis for the so-called “Trump trades” is at risk. Case in point the dollar has already more than retraced its post-election strength (Figure 1), and long term inflation expectations are rapidly approaching that point (Figure 2). Until [Wednesday] the equity market at near record levels showed the most resilience, but down 1.82% clearly cracks are beginning to form.
Risk of weaker hard data vs. political uncertainty
Because loan data suggests that consumers (Figure 5) and businesses (Figure 6) are in wait-and-see-mode pending details of fiscal policy easing, clearly further delays due to political uncertainty increases the risk of more weakness in hard data.