S&P 500 Trump

One Bank Talks Impeachment, Downside For Stocks, As Democrats Beg DoJ To “Fend Off” Trump

"They view the evolution of this probability as the major determinant of near-term equity performance. Our equity strategists think a 10% change in the assessed probability for a corporate tax plan is worth about 55 points for the S&P 500."

So on Saturday, we noted that Donald Trump is already looking for ways to sabotage former FBI Director Robert Mueller’s investigation into the administration’s ties to Moscow.

To be sure, that shouldn’t come as a surprise. Trump has obstructed all kinds of justice lately, so why stop now, right?

Of course the silliest thing about the idea that the White House would use an obscure ethics rule to try and prevent Mueller from looking at Jared Kushner and Paul Manafort is that this new effort to obstruct justice is only necessary because of Trump’s previous efforts to obstruct justice.

That is, had he just let James Comey continue with his investigation, it seems likely special counsel wouldn’t have been appointed in the first place. So this is yet another example of Trump making a bad situation worse for himself.

Additionally, as Reuters pointed out, if Mueller is granted a waiver by the DoJ, the Trump administration will likely institute a public smear campaign in an effort to undermine his reputation. Again, hardly surprising.

This is a story you’ll invariably be hearing a lot more about this week and on Saturday night, we got the following headlines:


Needless to say, it’s far from clear that anyone can count on the Justice Department to “fend off attempts to thwart the probe.”

What all of this presages for markets is abundantly clear: the policy agenda will be relegated to the backburner as everyone tries to figure out the extent to which the White House has become a KGB satellite and the White House tries to figure out how to stop the public from learning anything else about this administration’s coordination with a hostile foreign power.

Here with more on this is Barclays.

Via Barclays

As Russia headlines continue, healthcare and tax reforms as well as an infrastructure package are likely to suffer

The Department of Justice has announced that it has selected former FBI Director Robert S. Mueller III to serve as Special Counsel to oversee the previously-confirmed FBI investigation into alleged Russian government efforts to influence the 2016 presidential election and related matters. The announcement has elevated concerns that there will be an impact on the domestic policy agenda and also that the possibility of impeachment proceedings has increased. In our view, while the announcement of a Special Counsel does increase these concerns, it does not mean an impeachment is imminent. In fact, Special Counsel investigations often go on for several months, if not years. At this point, President Trump has enough political support in the House to make an impeachment very unlikely, though his disapproval ratings are heading higher (Figure 1). Importantly for markets, the ongoing tumult has made the passage of healthcare reform, comprehensive tax reform, and an infrastructure package before the November 2018 mid-term elections much more difficult. As shown in Figure 2, the domestic policy agenda is crowded, and the White House needs Congress’s help to address all of those issues, aside from trade reform, where the administration can accomplish quite a bit without it.


Overview of the Impeachment Process

Article 2, Section 4 of the US Constitution states that, ‘The President, Vice President, and all civil Officers of the United States shall be removed from Office on Impeachment for, and conviction of, Treason, Bribery, or other High Crimes and Misdemeanors.’ The process begins in the House of Representatives with an impeachment resolution and debate at the committee level (typically the Judiciary Committee). If the committee finds grounds for impeachment, it will lay out the specific allegations in an Impeachment Resolution, or Article(s) of Impeachment, which will then be debated on the floor of the full House, where a simple majority (238 Republicans, 193 Democrats) of those present is needed.

If the House votes to impeach, the articles are then presented to the Senate, where there is a trial-like proceeding. After hearing both sides, the Senate may deliberate in private and then vote, with a two-thirds majority required for conviction (there are currently 52 Republicans and 48 Democrats/Independents). If a president is convicted by the Senate, he is automatically removed from office, may be barred from holding future office, and may be liable for criminal prosecution. The vice president would likely then be sworn into office as the president.

Presidents Andrew Johnson (1868) and Bill Clinton (1998) were both impeached by the House, but later acquitted by the Senate. President Richard Nixon resigned from office before the House voted on his impeachment. No US president has been removed from office by the impeachment process. One reason why the bar is so high is because an impeachment, in essence, involves overturning the will of the voters, or in this case, the Electoral College.

Current Situation

In our view, this story is likely to stay front and center in the news cycle and crowd out policy discussions in Congress. For instance, while the House Ways and Means Committee convenes to discuss tax reform, we believe that passing tax reform under the FY2018 budget reconciliation will prove near impossible in 2017. For the impeachment discussion to move forward, first, Congress and the public would need more evidence of wrongdoing. With the recent announcement of a Special Counsel and the Senate investigation, led by Senators Richard Burr (R-NC) and Mark Warner (D-VA) of the Senate Intelligence Committee, Congress and the public will likely learn of more details over the coming weeks and months, which could have implications for Congressional Republicans ahead of the 2018 mid-term elections.

Given the GOP’s control of the House (238-193) and Senate (52-48), Congressional Republicans may have to weigh their options carefully ahead of the November 2018 mid-term elections. There will be intense interest in several of upcoming special elections in the House, including two key races, Montana’s at-large seat (25 May) and Georgia’s 6thDistrict (20 June), which has now become the most expensive House race in history, with over $40mn spent. Given the closeness of Kansas’s 4th District special election, which the Republican won by only seven points in a district President Trump carried by 27 points, some Democrats think 2018 will be a wave election as more details emerge in the Russia investigations and the domestic policy agenda grinds to a halt.

The longer this story remains on the front page, the less likely it is that Congress will be able to pass healthcare and tax reforms, as well as an infrastructure package. As we discussed, since the GOP leadership wants to use the budget reconciliation process to pass healthcare and tax reforms, Congress will first need to complete healthcare reform under FY17’s reconciliation and adopt the FY18 budget resolution before it can craft a tax reform plan under the budget reconciliation for FY18. The longer the Senate takes to pass a healthcare proposal, the less likely it is that Congress will have enough time to pass tax reform before the mid-term elections. And in our view, recent developments are likely to occupy lots of time on Capitol Hill and crowd out the domestic policy agenda.

Our equity strategists observe that since about March, there has been an ongoing diminishment of the market-implied chance that President Trump’s legislative agenda will be delivered. They view the evolution of this probability as the major determinant of near-term equity performance. Our equity strategists think a 10% change in the assessed probability for a corporate tax plan is worth about 55 points for the S&P 500, while differences in tax effects and market sensitivity will drive dispersion among sectors. Financials and transportation should see the largest swings as a tax plan evolves. Their upside case is for +300 points in the S&P 500 assuming a 25% corporate tax rate, no border adjustment, and a personal tax cut. A downside case would be about -280 points and assumes an admission of failure on tax reform as well as a reset lower in economic growth data.



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