To my clients:
First, given the season, unless circumstances warrant, I don’t intend to write a weekly update next Friday. The next scheduled update will be on January 3rd at the start of the new decade. My tentative topic at that time – "ignore the coming roar of 2020 U.S. election headlines."
It was an up week for North American stock markets with the Canadian TSX finishing up 0.7%; the U.S. Dow Jones Index up 1.1%; and the U.S. S&P 500 up 1.7%.
Of late, I’ve had a handful of client questions about the impeachment proceedings in the U.S. against President Trump, and what I feel the impact on markets will be. While I have made reference to these proceedings before, this week I will make it the sole topic of the update. And so, my non-nuanced response is… nothing. No impact. From a stock market perspective it is, and will continue to be, a non-event.
But the preceding is my non-nuanced take. There are always nuances. So let me delve into this a bit more…
I’ll begin by reiterating what clients well know – I do not like Trump on a personal level. I find his bludgeoning method of discourse and his consistent need to reframe all issues about himself intensely off-putting. At social gatherings at my house where the topic often comes up, I typically assert that if Trump were present there would be a good chance I’d ask him to leave (although I’m sure curiosity and politeness might curb this impulse). Perhaps my greatest worry concerns the diplomatic bridges he is likely burning with world leaders. I offset this worry with the hope that when Trump is removed from office (by election or by term limit – it won’t happen via an impeachment trial), other nation-states will recognize Trump’s leadership as a one-off blip in relations, and that there will be some return to normalcy with his eventual successor. At least I hope so, because another concern I harbor is that perhaps Trump is setting a blueprint for others to follow – I certainly hope not, but that is a topic for another day and another audience.
But here is where I get conflicted – if one is a U.S. citizen and is concerned about the here and now, and sets asides concerns about future diplomatic relations, my take is that not everything Trump is doing is automatically bad for U.S. prosperity (I purposely chose the word “prosperity” so as to avoid the other important issues of civil discourse, social division, environmental protection etc., all of which are suffering under his leadership). In fact, much is quite good. I’d suspect it to be no surprise that, given my profession, I believe in the power of free enterprise and generally believe capitalism to be the best model for social organization out of an imperfect set of models. As such, I believe the corporate tax cuts enacted two years ago to be a positive development for economic growth in the U.S. I also believe the new North American free trade agreement between the United States, Mexico and Canada (USMCA) to be an incrementally positive step for the U.S. (remember, we are looking from the perspective of a U.S. citizen, not one from Canada or Mexico). So too (in fact, moreso) the ongoing U.S./China trade negotiations which have recently resulted in a Phase 1 Agreement (yet to be signed however). The fact is that there are far more barriers to trade of U.S. goods in China than vice versa, and the challenge of opening up this market and levelling the playing field was one that needed to be tackled at some point. But frankly, I can’t imagine another leader (Republican or Democrat) who would have taken this challenge on, and certainly not in their first term for fear of losing re-election. In such a situation, the can would be kicked continually down the road making the challenge ever more difficult for any future leader to eventually take on. Perhaps it required an outright ----- (use your own derogatory description here) such as Mr. Trump to do it. Yet another, often overlooked, area of economic benefit under Trump has been the significant curtailment of government regulations on business. We all know about red tape, and jumping through regulatory hoops is a de facto tax on corporate America. Reducing this red tape aids corporate profitability (I understand that regulations are put in place for reasons, often with good intent – environmental and consumer protection leap foremost to mind – but I am also confident that all have experienced excessive red tape in their lives and posed the question to themselves ‘why does it have to be this way?” And I acknowledge that there is a significant risk that this agenda is pushed too far in the opposite direction).
The foregoing basically sums up my personal take on the Trump Presidency, including what I see to be the economic benefits of his policies. There is a reason I brought this up, which will become relevant in my more nuanced take on impeachment proceedings. But let’s first start with my non-nuanced take, and my assertion that it will have no effect on the markets or the economy.
The reason I make this assertions is simple – outside of some bomb-shell development capable of swaying a significant number of Republican votes in the Senate, Trump simply will not be convicted. The U.S. House Of Representatives voted largely along party lines to impeach Mr. Trump (which essentially means they recommended he be tried for high crimes and misdemeanors in the Senate), with all Republicans voting against impeachment and most Democrats voting for impeachment. It is worth noting that only two members broke party ranks and in both cases it was a Democrats who sided with Republicans against impeachment. There are 100 Senate seats. Republicans currently hold 53 Senate seats while Democrats hold 47. To be convicted in the Senate, a 2/3 majority is required – in other words, 67 votes. This implies that in addition to the 47 Democrats who would be required to convict, 20 of the 53 Republican Senators would also be required to vote for conviction. Again, unless some bomb-shell revelation is revealed, this is simply not going to happen. The world will go on, the election will happen, and this will go down as one of likely many asterisks associated with the Trump Presidency.
Now, for the nuances. The first relates to my preamble about Mr. Trump’s economic and business friendly policies. There is a very real possibility that moderate America will see the Democrats as over-reaching in their impeachment efforts, and will resent being dragged down an unnecessary path. More cynically, the right will almost certainly spin this undertaking as a purely partisan effort by the left to remove a President they detest. I suspect that the combination of both will sway some moderate voters who identify neither as Republican or Democrat and actually improve the re-election prospects of Mr. Trump. To the extent that Mr. Trump’s policies are pro-market and pro-economy, this will be a benefit to markets.
The second nuance involves a bomb-shell revelation that sees Mr. Trump convicted in the Senate. As remote as this possibility seems, with Mr. Trump, one can never say never (but one would think that if such a bombshell existed, it would have come to light by now). Should this happen, I suspect the immediate reaction by the markets would be rather severe. But, unless either of the two far left candidates (Elizabeth Warren or Bernie Sanders) are leading the field for the Democratic nomination, I think markets will recover. Economic momentum almost always supercedes political developments, and such momentum does not turn on a dime. Economic momentum seems to be building at present.
That’s it for this week. Next update on January 3rd. At that time I intend to visit a related topic – Ignore the Roar of 2020 Election Headlines! All the best and, to those who celebrate, Merry Christmas! To those who don’t, have a very happy Holiday Season!
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
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