The Daily Update - Skeletons in the Cohen Closet?

With a trend of chemical weapons use in Syria that, if uncontended, could be deemed standard practice by other warring states; and a pivotal moment in the war against Islamic State - it certainly doesn’t seem to be the best of times for the Trump Administration to head down this familiar road that has previously resulted in impeachment. After all, the FBI and Deputy Attorney General Rod Rosenstein must have had significant credence for the nerve to raid the President’s Attorney. As one former FBI agent stated, “I’ve been an FBI special agent for 20 years and have only seen a handful of searches executed on attorneys. All of those attorneys went to prison.”

It’s increasingly hard to see this Trump probing as a “witch hunt” when this latest development was sought by an attorney appointed by Trump and approved by a judge. Today’s further news that Trump believes he has the power to fire Special Counsel Robert Mueller shows ignorance of the law and recent history. The Code of Federal Regulations clearly states that only the Attorney General can fire them, and when Nixon pushed for his to be removed, both the Deputy and Attorney General resigned because they were unwilling to capitulate. So even Nixon followed the code. But regardless of whether Trump does or not it seems the closet has been opened. The Manafort raid 3 months ago has already resulted in a 12 count indictment (as well as various other charges for financial crimes). Could one expect even larger skeletons in the Cohen closet?

Given betting odds of Trump’s impeachment during his first term are now around 4/6 on, it’s worth asking what the likely market reaction would be under such circumstances. In fact, the reactions are mixed both in terms of volatility and overall performance, much of which is due to many other factors. Also, the sample size is thankfully small - with only four US presidents ever having faced impeachment. These were Tyler in 1842 (failed), Johnson in 1868 (acquitted), Clinton in 1998 (charged with perjury and obstruction but acquitted) and Nixon in 1974 with Watergate (resigned before the impeachment process and pardoned).

Modest data showing a positive stock market exists for the first two, and in fact the S&P 500 grew almost 28% between Clinton’s affair breaking and his eventual acquittal. However, during Clinton’s trials there was a -22% drop in the S&P 500, but this significant slump in-between is widely contributed to the failure of LTCM and the Russian Crisis. Nixon’s experience may seem most similar and the S&P 500 fell 28% between his Senate investigation and his resignation; but again his damaging policies and the failure of the Bretton Woods standards are usually blamed for the market’s downward correction. So perhaps there isn’t significant cause for concern that an impeachment would cause lasting damage to the equity markets but it may be somewhat brash not to at least expect some volatility should the latest raid uncover any evidence of untoward financial or personal conduct.

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