One of the most extraordinary things about the inexorable rise of stock markets in recent times has been the ability of investors to block out anxieties over both geopolitical and domestic political storm clouds that in the past would have had them running for cover. A rogue nation lobbing missiles around the place whilst it threatens to attach nuclear warheads to them in the future would at least have caused a spike in volatility, as might the rise of any number of populist political movements in the so-called developed world. But volatility has remained at historically ultra-low levels, and market players seem more concerned with not missing out on the next upside leg than with paying much attention to as yet unfulfilled peripheral dangers.
We might argue that such an attitude is not entirely sensible, and one that sooner or later is "cruisin' for a bruisin'. Much good it would do us, though ..... Haven't you heard ? The market is ALWAYS right, and in terms of dollars and cents those people predisposed to listen to such warnings have been ..... well, wrong. If you don't believe it, just look at the chart. The fact is that ignoring the factors that one might expect to induce a little caution has been the successful market ploy, and one probably can't expect attitudes to change until a major pain-inducing reaction to some event actually takes place ..... as many believe it must at some point.
Anyway, we were prompted to muse on this phenomenon by this morning's market reaction to two weekend developments : 1.) The news that the former National Security Adviser Michael Flynn had pleaded guilty to lying to investigators in the probe into Russian involvement in the US election, and 2.) The Senate's passing of the tax reform bill.
Now, the first issue is a very big one indeed ..... a deal that allows Mr Flynn to plead guilty to a comparatively minor charge suggests that he has some really juicy information to offer in return. Veteran Senator Dianne Feinstein, a key member of the Senate Intelligence Committee albeit one whose anti-Trump credentials are not in doubt, has said that what we are hearing opens up the possibility of obstruction of justice charges being aimed at the President. In that extreme eventuality, impeachment would surely be inevitable (failing a Nixon-like resignation deal).
People will have their own view on how likely such a scenario is (at this stage, it's still a long way off), but whatever the case Mr Trump will be fuming. Politicians and the media can't get enough of the issue of course, and he would much rather that all the attention was focused on the passage of the tax bill through the Senate. The President's triumphant welcoming of the vote in the early hours of Saturday morning may not chime with everybody's view of things, but as the first piece of major legislation likely to be achieved by this administration (finally), it is certainly significant.
Of course, for that to happen the two versions of the bill passed by the House of Representatives and by the Senate still have to be merged into one ..... which will not be straightforward. But on balance, it should be achievable .... and possibly even by mid-December.
The President must love the markets, and wish that every one else was like them. Not for them the possible ramifications of the Russian investigation ..... rather, they are much more interested in what the probable passing of the Tax Bill means for prices. Unsurprisingly, the answer to that is we are seeing a re-heating of the Trump Reflation trades : stocks are higher as companies will benefit from the large cut in corporation tax and the deal to repatriate overseas cash holdings. That also boosts the dollar, as does the upward pressure on rates implicit in a boost to growth (estimated to be about 0.2 / 0.3% per annum) and the inflationary pressures that come with it (maybe !). Inflation is of course bad for bond prices and pushes bond yields higher.
All that is the understandable reaction to the tax package, and we'll see whether if it turns out to be of the knee-jerk variety or whether it generates the wider level of enthusiasm that we last saw when Mr Trump was first elected. Since that time of course only share prices have behaved as predicted (directionally-speaking, at least). The dollar has spent most of 2017 heading south, and bond yields have fallen despite short-term rates being hiked (hence, the yield curve flattening). Does tax reform signal the start of a new "Trumpflation" phase ?
It would be a very big call to suggest something like that at this stage ..... and in fact there are plenty of question marks hanging over the tax package and whether it will deliver to the economy what its proponents promise. The administration may call it a reform to benefit the middle-classes but it does look remarkably like one that's been written for the wealthy. That's political dynamite in any context, but from an economic angle in a consumer-led economy like the US how do you boost growth without offering more to the man and woman in the street ? Nobody really believes in the "trickle-down" effect of wealth any more, do they ?
And slashes in corporation tax and repatriation deals will surely help share prices, but the evidence of late is that they do not lead to extra corporate investment and growth but are more likely to be used for share buyback schemes. That in turn boosts share prices even further, which once again is of more benefit to the already wealthy rather than your average Joe or Jane. In many ways, the package looks like one that might be put in place to start an upturn in the economic cycle, rather than one designed to prolong one that been going for almost ten years.
Still, we won't be able to judge all that until some time in the future . The markets have to give a more immediate verdict ..... and their verdict it seems, to no one's great surprise, is pretty gung-ho.