News of President Trump allegedly requesting the FBI to end an investigation into his former National Security Adviser, Michael Flynn has markets spooked.

Just how bad is it?

As I write this piece in the last trading hour the market is down roughly 350 points. Sounds bad. But consider that’s a 1.58% move. Historically speaking, that’s not a noteworthy day. Could it be the beginning of something much larger? Possibly. We’re inclined to think not, but it’s possible to be sure.

Tip of the iceberg?

According to Yardini Research there have been four ten-plus percent corrections in this eight year bull market. The last correction ended over a year ago. Many think we’re not only due for a 10-plus percentage point drop but rather we are seriously past due. As you may know market corrections are considered healthy in a long term bull market. They provide an opportunity for more money to flow into markets as those people who have been sitting out the rally can finally buy in. However maybe it’s not the start of a correction, maybe this is the beginning of the end for the bull market and the start of a bear. You don’t have to look very hard to find people with this opinion.  Please be assured, we are not in that camp. In fact, even if the worst-case scenario many fear (or are hoping for) plays out we would expect the market to actually become more bullish rather than less.

What is this worst-case scenario you speak of?

The obvious answer is, of course, impeachment of the president. There is a significant percentage of Americans who have been hoping for, if not outright calling for President Trump’s impeachment from day one. With each new scandal, accusation and outrageous fact-free Tweet the chorus grows louder. Online gambling sites while not always the most accurate of indicators seem to get things right more than not and the probability of a Trump impeachment is rising. It is our contention however that President Trump will not be impeached (barring the release of new information). Republicans hold too many seats in the House. However, from a market perspective it’s a little more nuanced than the political fate of Donald Trump. Why markets have been stagnant as of late and sharply lower today is because investors are coming to realize the show in Washington stands between them and what they really want. Which broadly speaking is Trump’s economic agenda.

So if healthcare reform, tax cuts and infrastructure spending get pushed back, then what?

Then we’re back to square one. Stocks can again be valued based upon their earnings and growth forecasts without the possible windfall tax-reduction and regulation elimination scenario. In fact, we are of the opinion that the slowing in the growth of the market since early 2017 is the result of investors discounting the likelihood of the Trump administration advancing its domestic agenda. If we’re right that’s a strong argument against a market crash as some such have predicted. More simply stated, we don’t see a long protracted bear market if the Trump mess gets messier. We think the realization that much of Trump’s agenda will fail to pass this year and won’t be brought up before the mid-term elections in 2018 is already priced in the market. In the short term expect more bad market days as algorithmic trading reacts to headlines. Longer term we’d consider those days buying opportunities. Truth be told, a President Pence would probably be more successful at advancing Trump’s agenda than Trump.

What does all of this mean for my portfolio?

At Monarch every portfolio is customized. As such it’s impossible to say specifically how we are dealing with each however here are some broad themes that you may be able to apply.

• We are not reducing exposure to stocks or taking significant market-short positions.
• We are also not adding long positions to our portfolios today and until further notice.
• Bonds tend to hold up fairly well relative to stocks in corrections (if this is the beginning of a correction) so any work we were doing to remove bonds in favor of stocks (long term we view bonds unfavorably) is on hold.
• The proceeds of bonds that mature or are called are not immediately being used to purchase new bonds – cash looks more attractive on a short term basis.
• For new clients in which we are removing legacy positions from your old advisor we are continuing to do so. However, we are not as aggressively buying new positions with the proceeds. Again, very short term cash looks more attractive.

As always, please contact us if you would like to explore any of these points or if we can be of assistance in any way.