The words are powerful as is the concept. “Obstruction of justice” is a term in law. Here is a reference by the Cornell Law School.
Here are the operative sentences that are now altering markets and the economic outlook:
§ 1503 applies only to federal judicial proceedings. Under § 1505, however, a defendant can be convicted of obstruction of justice by obstructing a pending proceeding before Congress or a federal agency. A pending proceeding could include an informal investigation by an executive agency.
Some Bullets
We don’t know who said what in a room where two people met alone. We weren’t there. We don’t know about tapes or records, but one of the two persons present in that room documented the conversation in a memo, and he (Comey) looks to be open to subpoena and testimony under oath. As the director of the FBI he meets the test articulated in 1505.
We shall find out soon enough. Or we may never find out.
Now to markets.
The US stock market doesn’t care about Japan’s political issues with its leader Shinzo Abe and his potential scandals with a school or his wife’s potential scandals with a different school. Nor does it care about Turkey’s President Erdogan or about Venezuelan President Maduro. It should, but it doesn’t.
But the US stock market does care about matters involving the president of the United States. §1503, cited above, applies only to federal judicial proceedings. At the moment it is not the applicable section.
Under § 1505, however, a defendant can be convicted of obstruction of justice by obstructing a pending proceeding before Congress or a federal agency. A pending proceeding could include an informal investigation by an executive agency. So, former director Comey’s agency meets the test. Did the president commit a crime?
I believe this question is now a potential game changer. We articulated those reasons in interviews sequentially with USA Today, the Wall Street Journal and Bloomberg radio (May 17). That was on the first day after the revelation regarding the Comey memo.
Our view is that markets are repricing as the odds of a tax reform bill are falling. They are surmising that the Trump economic agenda is now injured. They see Congress as likely to be bogged down in investigations and hearings. They see businesspersons and investors going to the sidelines because they do not know what the new rules will be. Or even if they will come to pass.
Markets are already starting to discount a change in the Congress which narrows the Republican majorities in each of the chambers. They are surmising that a shift in the House to a Democrat majority will lead to an impeachment hearing and impeachment bill that will pass the House. We have the Bill Clinton model to examine. It is preceded by the Richard Nixon model or the Teapot Dome scandal of a century ago.
What happens in the Senate is less certain.
So, market agents move to cash and wait. Businesses defer decisions. Investors get scared. The bottom line is sellers outnumber buyers while buyers move to the sidelines.
The change is abrupt, and some argue it was long overdue. Was it?
Maybe yes, or maybe no.
Overdue is based on valuation assessments. If a major tax reform bill threads its way through Congress and is signed into law, markets will go much higher. If tax reform fails, markets will dip lower or turn out to be fully priced and going nowhere.
The Comey memo news and the charge of “obstruction of justice” has altered the odds, so markets have abruptly adjusted. Such is the nature of instant news and response.
We continue with basic themes.
- The 4%, high credit quality, tax-free bond is a gift to an investor in any higher tax bracket, whether at its present or future level.
- The US stock market will be much higher if we get a tax reform bill.
- The Republicans know they must produce a tax reform bill before next year’s midterm election, or they risk being thrown out of office.
- Financials, including banks, are best positioned for deregulation and for improvement with or without a tax reform bill.
- Tech is positioned along with global healthcare for benefit to shareholders if we get repatriation tax relief.
- The alternative minimum tax (AMT) is a front line candidate for repeal if we get a tax reform bill.
- The tax bill is not an easy political lift, but the motivation to get it done is high. One can argue it is even higher now after the Trump-Comey affair.
Under these assumptions, a market sell-off is a buying opportunity. We seek to take advantage of it.
We are overweight banks and financials and have rebalanced them. We are buyers of a 4% long-term, well-researched, tax-free municipal bond.