Strong economic outlook may help cushion Trump through Washington turmoil

After days of brushing aside the political turmoil engulfing Trump’s presidency, Wall Street finally took notice and sent stocks reeling Wednesday in their worst drubbing in months.

Whether the retreat marks a reset of investors’ sentiments remains to be seen, but there's one important thing Trump has going for him that some of his similarly embattled predecessors did not: The economy looks pretty good and many signs point to even better days ahead.

And if there's one factor that matters to all voters in all periods, it's their own pocketbooks.

Average incomes for workers have been rising steadily, if somewhat modestly. Job growth has been resilient. Interest rates and inflation remain low, and the Federal Reserve is still pumping money into the financial system.

Even the global outlook is as good as it’s been in several years, with the Eurozone’s prospects having brightened, China’s growth on track and long-troubled economies of Brazil and Russia looking more upbeat.

In short, there’s solid momentum for the American economy as it nears the end of eight years of expansion, already the third longest on record.

“We came into this year and this administration in clearly good shape economically,” said David Blatt, chief executive at Capstack Partners, an investment banking firm in New York. “I’m looking at a lot of the fundamental drivers moving the economy, and we had very good traction in terms of the direction that we were going in.”

Blatt remains optimistic, but is nonetheless keeping a close eye on the turbulence in Washington and the potential effect on Trump’s promises for tax cuts, infrastructure spending and overhaul of regulations.

Stocks and bonds had soared upon Trump’s election, but in recent weeks what many have been calling “Trump trade," fed by bets from speculators, had eased as investors lowered their expectations for quick policy changes in Washington.

At the same time, financial markets had seemed almost impervious to the world of new problems that Trump kept bringing upon himself, made only worse by his habit of lashing out with intemperate tweets.

Investors barely flinched at Trump’s decision last week to fire the FBI director, James Comey, or at the reports this week that the president exposed highly classified intelligence to the Russians.

Economists such as Nicholas Bloom, a Stanford University professor who’s been tracking the rising degree of uncertainty in recent weeks, were puzzled that the markets were shrugging off the succession of troubling news coming out of Washington.

But on Wednesday, investors of large-cap stocks, in particular, seemed to be awakening or catching up to the realities of the growing risks from the political thunder from Washington.

The Dow Jones industrial average and the broader Standard & Poor’s 500 index both fell 1.8%, the biggest daily drop since September. The tech-heavy Nasdaq composite lost 2.6%, its biggest decline since last June.

The catalyst for Wednesday’s plunge in the markets were new disclosures that Trump allegedly pressured Comey to drop the investigation into former National Security Advisor Michael Flynn. That intensified the questions and demands for investigation into whether the president sought to obstruct federal investigations into ties between Trump’s associates and Russia.

The crisis in the Trump White House has prompted parallels to moments of the Watergate scandal in 1973 when public confidence was shaken and stocks and bonds declined relentlessly until the resignation of President Nixon in August 1974.

But the nation’s economic condition was very different then. It was a period marked by a long recession, stagflation and an oil shock.

“The economy was already in the tank and due to nonpolitical factors,” said Chris Rupkey, chief financial economist at Mitsubishi UFG Financial Group in New York.

By contrast, today’s economy is in “a sweet spot,” Rupkey said.

While overall growth isn’t blazing, it’s been steady and moderate, and forecasts are for a slight pickup in the nation’s gross domestic product in the near term. Corporate earnings are on the rise again, he said, and the Fed “hasn’t really taken away the punch bowl here.”

Even so, analysts know that financial markets — and the economy — could go south on Trump if the political crisis deepens.

“The lesson of Watergate was, there was always another shoe to drop,” Rupkey said.

Like many other analysts, Jack Ablin, chief investment officer at BMO Private Bank in Chicago, also had wondered whether any news from Washington could dampen stocks. He theorized that perhaps the bar had been raised that could rattle investors as they had become inured to startling political news.

“It’s remarkable that markets barely responded to terrorist attacks in the last couple of years,” Ablin said.

While agreeing that economic fundamentals are solid, Ablin sees vulnerabilities in the markets and the broader economy. He thinks stock valuations are stretched, in part because there’s still so much liquidity sloshing around the world, thanks to the billions of dollars of securities bought by the Fed and other central banks to support growth.

What’s more, Ablin and other bankers say that while surveys show business confidence is very high, in practice businesses are not behaving particularly confident. They’re not drawing on credit lines or investing, but instead taking a wait-and-see approach, they said.

Blatt, the CEO of Capstack Partners, said his business in real estate continues to be strong, especially investments in apartments. But there has been a slowdown in transactions, he said, and Blatt is looking for the Trump administration to make strides on its campaign promises on taxes and infrastructure by this fall.

“If there continues to be no advancement of a lot of business and economic commitments made around election time, and there continues to be [political] headlines that we’ve been seeing, that will inject a longer-term uncertainty into markets,” he said. “If we can’t get that clarity, we could get paralysis.”

don.lee@latimes.com

Follow me at @dleelatimes

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