The stock market has been having a rough week and the president, unsurprisingly, says it is because of impeachment.
As I wrote last week, the markets are not pleased about impeachment, but the president’s observation that impeachment “is going nowhere” is instructive. Trump may be impeached but he is unlikely to be removed from office. My read of the situation is that investors are concerned that impeachment may bring out the worst in Trump, from their perspective — trade war escalations, government shutdowns, and the like — and so to the extent the markets are against impeachment, what they’re really against is what Trump will do if he’s impeached.
But anyway, while impeachment moved the markets some last week, it does not appear to be the key driver of market moves this week. Stocks fell sharply on Tuesday and Wednesday because of worrying economic data points: the ISM manufacturing purchasing managers’ index on Tuesday and the ADP private payrolls report on Wednesday, which showed U.S. manufacturing in contraction for the second consecutive month and weakening (though still positive) job growth, respectively.
On Thursday, we got the ISM services purchasing managers’ index and it was also disappointing. While it showed the service sector continuing to grow, the pace of growth was well below expectations. This undermines a key anti-recession narrative: That while trade wars and global economic slowdowns are putting a damper on U.S. manufacturing, the service sector (which is far larger) is less affected by these problems and continues to expand robustly. Now, the “robustly” part of that claim is more in question.
The Dow rapidly lost 300 points after Thursday’s services report, and then regained those points nearly as rapidly. Some people are interpreting the quick rebound as a market reaction to increased expectations of interest rate cuts by the Federal Reserve, though it’s not obvious why it should have taken the market an hour to figure out that weaker economic data might make the Fed more inclined to cut rates.
I think it’s fairer to say the economic picture remains unclear — for example, data from ISM’s competitor Markit paints a less-alarming picture on manufacturing, which Markit attributes to its practice of surveying a larger and more representative set of firms than ISM — and so it’s difficult for market participants to decide exactly how much to worry. As of midday Thursday, the Dow remains down about 800 points for the week.
On Friday, we will get the monthly jobs report from the Bureau of Labor Statistics. This report is more reliable than the ADP report, and if it shows further deterioration in the job situation, you can expect more negative reaction from the markets.
It is true that the Federal Reserve can be expected to take steps to mitigate the economic and market fallout from shocks to the U.S. economy, whether they arise from the president’s own policy actions or other factors. That’s what the Fed is supposed to do. But the Fed is not magic, and it’s also not using the powers it has as aggressively as it probably ought to (or as aggressively as the president would like it to.)
A significant economic slowdown is a major concern, and a recession is a possibility. To the extent impeachment is entering into the market’s calculus as it evaluates those risks, it is likely because President Trump is less likely to make good policy choices that counteract economic problems while he faces impeachment.