US stocks tumbled in trading on Wednesday to their worst decline since September, but investors shouldn’t worry too much.
All three major US indexes were down. Some of the biggest gainers from the so-called post-election “Trump trade,” like financials and private prisons, fell harder than the broader market.
Analysts have mostly attributed the sell-off to political uncertainty after a series of reports suggested President Donald Trump asked former FBI Director James Comey to end the investigation into former national security adviser Michael Flynn’s dealings with Russian officials.
While the drop inspired a lot of hand-wringing among traders and the financial media, there are three big reasons that this could all blow over.
The underlying economy is solid
Even though much of the drop is being attributed to political events, it’s worth remembering that the market is, theoretically, a reflection of the future expected earnings of companies.
By most accounts, those companies are doing just fine.
Corporations in the S&P 500 posted 14% earnings growth during the first quarter of 2017, the third straight quarter of profit growth, and the strongest since the third quarter of 2011.
Additionally, US macroeconomic conditions point to the same slow but steady growth seen throughout the post-crisis period. The labour market is still in good shape, industrial production has ticked up, and while the housing market produced disappointing data this week, it remains close to cycle highs.
The market will likely still get what it wants
Let’s play out the most extreme scenario here for Trump. If it turns out there was serious wrongdoing on the president’s part, and further that not only Trump but the entire White House are somehow implicated, there is still good reason to think that the market will get the policy it wants.
Even if Trump and Vice President Mike Pence are impeached or resign, the presidency would then fall to House Speaker Paul Ryan. Ryan — much like Trump, Pence, and Wall Street — wants lower corporate taxes, less regulation, and to kick start US economic growth.
Plus, Republicans still hold the House and the Senate and can set the legislative agenda.
Even if the scandal explodes, the political will to get some of the Wall Street-friendly policies passed would still be there.
Perhaps the biggest reason not to get too worried about Wednesday’s move is that these kinds of drops are common, and generally not the end of the world.
As pointed out by JPMorgan Asset Management in their quarterly Guide to Markets, stocks have averaged a drop of 14.1% at some point in each calendar year since 1980 and have finished positive 28 of those 37 years.
Put another way, big drops happen in markets almost every year, and Wednesday’s move isn’t too big in the grand scheme of things.
Further, recent history suggests the market could shake political concerns off. There were a series of instances over the past two years in which markets stumbled after significant political events — Brexit, China’s currency devaluation, North Korea concerns, the night of the US election — and none caused a lasting dent on the eight-year-old bull market. It stands to reason that this may be the case again here.
More from Bob Bryan:
- ‘I don’t worry about things that are outside of my control’: Paul Ryan pledges to advance tax cuts amid the Trump bombshells
- Gold is surging
- Americans like many aspects of Trump’s tax plan — but they may not like its outcome
- The percentage of Americans without health insurance hit an all-time low
- Mitch McConnell just set up a big showdown between GOP lawmakers and Trump over taxes
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