Until this week, markets studiously ignored White House controversies. What mattered to investors was not who said what to whom in the Oval Office, but Donald Trump’s ability to deliver on tax and fiscal promises.
Investors are no longer deaf to the din surrounding the presidency. On Wednesday, US stocks fell, the volatility index rose and the dollar dropped 1.6 per cent against the yen. The index tracking the dollar against its peers has dropped to pre-election levels. “Political chaos is bad for the greenback,” wrote analysts at Commerzbank.
There is a difference, though, between noting such developments and drawing conclusions from them. Washington’s febrile atmosphere hangs heavy on markets but so do other factors, such as poor housing data and stronger eurozone numbers. Marc Chandler, currency strategist at Brown Brothers Harriman, notes that Washington politics can be “a major distraction” at a time of investor worries about the US economy.
There are well-thumbed moments in US history when internal political strife looked like the only thing that mattered to markets. Simon Derrick, currency analyst at BNY Mellon, points out that in the six months after February 1973, when the Senate kicked off the Watergate investigation, the dollar fell 13 per cent. And there was a 9 per cent fall from November 1986 to February 1987, when the Iran-Contra affair was at its height. Did Watergate and Iran-Contra batter the dollar? The evidence is mixed. Watergate unravelled in the teeth of a bear market and a looming oil crisis, but the period also saw aggressive increases in Fed fund rates. Iran-Contra played out at a time of rising interest rates and the signing of the Louvre Accord, designed to stabilise the dollar.
The conclusion? Lots of stuff happens at the same time. As Mr Derrick suggests, the only safe inference is that these dollar declines “coincided” with Watergate and Iran-Contra. On this occasion, it seems best to go with investment instinct. How does the investment climate feel? Tax and fiscal policies were already stalling, global growth remains on track, the Fed is poised to raise rates, and oil is recovering. The White House may be in turmoil, but investors should be lead by the economy rather than politics.