Why Wall Street Doesn't Care About Chaos in the Trump Administration
Business + Economy

Why Wall Street Doesn't Care About Chaos in the Trump Administration

REUTERS/Brendan McDermid

President Donald Trump tweets something flattering about a foreign dictator, the market shrugs. He bombs Syria, the market shrugs. Major legislation gets blown up in Congress, the market shrugs.

No matter what happens, not only in Washington, but also in pretty much any corner of the world, the financial markets seem to care little. Whether it's signs that the economy is weakening, or administration officials' often-weak grasp on facts or worries that the world is teetering on the brink of nuclear catastrophe, investors just seem to turn it all off.

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That could be a problem.

Extended periods of extreme calm historically have not ended well when it comes to the stock market. When measures of complacency reach multi-decade lows, as they are now, that generally means investors are underestimating risks and the market is susceptible to any shock that comes its way.

One barometer of market fear, the CBOE volatility index, closed Monday at its lowest level since December 1993 and fell even lower Tuesday.

That level itself has kindled a debate over whether the market is taking events too much in stride.

For now, though, the side of calm, cool and collected is winning. What's happening in Washington is not rattling Wall Street even as it generates plenty of water-cooler chatter on Main Street.

"It's so important to divorce yourself from all the background noise surrounding Trump that's making headlines. It's easy to get sidetracked," said Greg Valliere, chief global strategist for Horizon Investments and a leading voice in the connection between politics and the markets. "The more accurate focus would be on the fundamentals, and I think the fundamentals are really good."

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'Goldilocks' on the economic front

As things stand, the economy is at a bit of a crossroads.

Job creation has steadied after a fast start to the year, and economic growth for the first quarter was a paltry 0.7 percent. However, the consensus is that conditions will accelerate as the year goes on.

Corporate earnings surged 13.5 percent to begin 2017, with 75 percent of companies topping Wall Street expectations, according to FactSet. Profits are expected to continue to climb through the year, with expected growth rates of 7.2 percent, 7.7 percent and 12.5 percent over the next three respective quarters, for total annual growth of 10 percent.

Economic conditions remain favorable overall if a bit tepid, with interest rates still low in historical terms and inflation held in check, though worker paychecks are growing at just a 2.5 percent annual rate.

"Everywhere I look I see basically Goldilocks — moderate growth, moderate inflation, moderate interest rates, decent earnings," Valliere said. "There's nothing on the economic front that stands out as troublesome."

That, however, could be the trouble.

Market experts who watch the Vix know that a low reading often means trouble. Peter Boockvar, the chief market analyst at The Lindsey Group, pointed out that the 1993 Vix low, for instance, preceded a 7 percent fall in the S&P 500.

"The Vix we know tells us nothing about where markets go in the short term as it's just another short term indicator on the scoreboard," Boockvar said in a note. "But at the same time it's easy to say that from this level the next 5 to 10-plus points are up, not down with just the question being when and how much the stock market falls in that move (assuming it does)."

Focusing on the big picture

For most investors, though, a short-term move in the market doesn't really matter.

What investors with a longer time horizon need to worry about is whether the complacency is going to trigger not just a brief trade lower but a longer term move down. Most are betting against something more serious.

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The most recent American Association of Individual Investors survey shows pessimism at just 29.9 percent, a notch below its historical average, while market optimism — or the bullish view that stocks will be higher six months from now — is at 38.1 percent, a shade below its historical average. Neither indicator, in other words, is in extreme territory.

AAII respondents, however, are heavily invested in stocks, with an allocation of 65.3 percent, about 5 percentage points above the long-term average, and bonds are at just 18 percent, only 2 percentage points above normal.

Quincy Krosby, chief market strategist at Prudential Financial, believes the market remains confident not only in the economy generally but also in Trump specifically and the team he has assembled to put his agenda into action.

"The market is not penalizing him for coming in and realizing that government is a much more difficult endeavor than a business investment," Krosby said. "The market's giving him what he should be given, which is an understanding that he's getting used to the way that government works."

What's left then is a climate where investors are willing to tune out the noise in Washington so long as it appears that action is coming, even if on a longer time frame than anticipated.

After all, investors already have weathered multiple major storms over the past decade, from the financial crisis to multiple cases of geopolitical turmoil. That makes the Trump cacophony just more static in the background, said Carol Roth, head of Intercap Merchant Partners, a former investment banker who now promotes entrepreneurship.

"The market has done a really good job of digesting the information, because things really aren't as bad as they seem out there," she said.

"If you're wanting to bet on something, bet on the market," Roth added. "The reality is you have to be optimistic overall. Those who have been pessimistic over long periods of time — that hasn't worked out very well."

This article originally appeared on CNBC. Read more from CNBC:

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