Since I’ve started this site, I’ve tried my best to stay away from politics and focus on informational topics related to finance. This post is no different, but does include a dash of political opinion and speculation. While these types of debatable topics can tend to alienate people and I’m sure will drive some readers away, I encourage you to be open minded with anything you read or hear. It is critical to be able to take in and understand someone else’s point of view, decide what information is credible and rational and to adjust your own stance accordingly. This has become especially important in today’s “fake news” era. With that being said, let’s dive in.
Let’s start back in November of 2016, days before the election. The Dow Jones was sitting just below 18,000 and Clinton was strongly favored to win. Now before we move on it should be noted that while the stock market should have minimal correlation, if any at all, to what is occurring in the White House (unless there’s financial legislation or a budget being passed) it has seemed to manipulate the market noticeably in the past and during this election. Having pulled off the upset, Trump shook the market – nobody was quite sure if stocks would respond favorably or dip from the shock.
In the following few days, shares of Goldman Sachs skyrocketed from 175 to 200. Weeks later it was well above 230, boasting a gain of over 30%. This seemed to be an indicator to the rest of the market that they too should follow suit and that everything was going to be fine. Trump’s promises for deregulation of financial companies and focus on economic expansion would be good for everyone. The Dow shot above 20,000 for the first time ever in February 2017 and has since continued to climb over 21,000. This rise in the market immediately following the election became known as the “Trump bump”. Because we love to have a storyline and a reason for everything, Trump’s win became the reason stocks had risen. Is it possible that he did in fact help raise the price of shares across the board? Yes. Is it likely that he alone was the only factor driving this? No.
But what makes things even more interesting is that ever since his election win in November, he has had the Russia Investigation hanging over his head like a dark cloud, as he so eloquently described it. Regardless of this fact and it’s increasing severity, stocks have continued to rise. Now let’s step away from Trump for the moment and discuss the market alone.
The stock market, and economy, has been on a tear since the recession of 2008. In fact since 2009, we have had one of the greatest and longest economic expansions in history just behind the internet boom of the 90’s. This has been amazing for creating wealth, but the problem is that recessions will never go away and our economy is due for one. If you want an in depth analysis into the current state of market affairs, mr money mustache wrote a great piece on it here. But if you don’t feel like checking it out, he basically argues that the market has become highly inflated relative to its actual value and that even the longest bull market since 1900 which occurred from 1991-2001 only lasted 10 years. If you’re not a math whiz, 2009-2017 is 8. We’re getting close. Now who’s to say that this wave doesn’t hang on for 5 or 6 more years setting a new record? It’s entirely possible, however, like the Tulip bulb craze in Europe centuries ago, people will come down from these prices on the Moon eventually.
It’s impossible to predict when the next recession will come or how severe it will be, we can only say that one is coming. What causes one? Well very generally, it occurs when people realize that their assets (ie stocks) are overvalued – meaning they’re trading much higher than what they’re worth – and people decide to sell. If other people/institutions agree or some external event causes them to panic the market may begin to dip. As more people still see a sharp drop in prices they try to get out as well causing the market to drop further. As the market plummets, banks and other lenders tighten up on their loans and ask people and businesses that have borrowed to pay up. This leads to businesses borrowing and spending less, laying people off, and people in general spending less and saving more. When the panic diminishes and people with liquid assets decide the time is right, they go in and scoop up stocks, real estate, and whatever else they can get their hands on at a sizeable discount. This creates a floor for how much the market can fall and generally once this spending starts to ramp up again (which is often assisted by the fed creating “cheap money” and lowering interest rates) the market starts its climb back up. Recessions can be scary but they are an integral part of the system, bringing prices back to reality.
Now, back to Trump.
Typically the legal system works like this; crime, charge, conviction (or acquittal). The media on both sides has not done a great job of being fair with the Russia Investigation but I will say this, no matter how you spin it, it does not look good for the Trump Administration. In fact just this past week, a Democrat filed Articles of Impeachment against Trump. This is not a good look for either side as it is far too early to make any kind of decision like that. However, I think it will be coming again with much more seriousness down the road. Trump Jr’s email scandal has provided direct evidence to confirm that there was in fact some shady decisions being made by the Trump team. Not to mention the fact that Trump allegedly tried to impact the Flynn Investigation and has said many other things – or tweeted them rather – to incriminate himself further. With Trump’s personality I think it would be unlikely that he would make the decision to resign. Only following through completely with impeachment would get him out of office.
That being said, the FBI has been actively investigating for well over 6 months already with some recent major revelations in the case. Who knows exactly how long it will take the FBI to conclude but it wouldn’t be inconceivable to imagine it ending within 12-18 months, or less. At that time (in the words of Roger Goodell) I think it is more probable than not that Trump will be found guilty and charged with crimes capable of removing him from office. Remember how I said that recessions could be caused by over-inflation of assets and external events? Well, this could be the perfect storm. A presidential impeachment could be just the thing that causes panic and worry as to where the economy is headed. On top of that, people will realize that their stocks have been artificially propped up with no real substance behind them causing a sell off in shares. And of course, the rest of the process ensues.
Please do not think of this article as a Doomsday Declaration or as me saying that the next Great Depression is right around the corner. It’s simply a scenario that has a low probability of playing out in the future. It is more of an interesting thought experiment tied in with a bit of reality than anything else. Who knows what 2018 or even the rest of 2017 may bring, but I’m sure it will be quite interesting to follow.