Comey Comes to Capitol Hill

As always, our political commentary is non-partisan by design. We favor no politician or party and assess politics solely for its potential market impact.

All this week, we've read ad nauseam that stocks were treading water ahead of former FBI Director James Comey's Congressional testimony, which would supposedly bring the biggest televised bombshell since David Lynch revealed who killed Laura Palmer.^[i] Bars across America held viewing parties with themed cocktails for those who like a little Irish Covfefe or Impeachmint Mojitos with their C-Span. Yet when it was all over, for all the buzzy coverage and day-drinking,^[ii] investors didn't have any new information. Comey revealed no new facts and presented very little new evidence. The lack of substance underscores what we've said since this whole kerfuffle ... um ... kerfuffed: Absent any actual evidence of wrongdoing that could increase the probability of a presidential impeachment, the Comey saga is a sideshow for markets-and even then, it isn't at all clear how an impeachment trial would affect stocks. In our view, it's all just noise to markets and isn't actionable for investors.

Markets move on probabilities, not possibilities. They are also quite efficient and adept at pricing in all widely known information-hopes, fears, speculation, opinions, conspiracy theories, you name it. Opinions of Comey, President Trump and all related matters have dominated the Internets for months. They are all over the place, both literally (on every publication) and figuratively, making this the textbook definition of a widely known event. We have seen many an impassioned argument for or against the administration based on nothing more than feelings, assumptions and guesses. And as Comey's performance progressed, the live-blogosphere and professional soap-boxers simply gave us one more round of said evidence-free treatises. We aren't condemning-it's just what these folks do for a living. But what markets do for a living is price all this stuff in. Anyone trading for the last several months is most likely well aware of all these competing opinions and probably has their own viewpoint. The stock prices they bought or sold at incorporated their views on this and many, many, many other factors. People have spent months considering the circus, so markets have considered it. Absent new, material, factual information, there is really nothing more for investors to consider here.

There is, however, one interesting nugget-a warning from Comey on the dangers of accepting thinly sourced media claims at face value. About 45 minutes in, Senator Jim Risch (R-Idaho) asked whether a February 14 New York Times article claiming-based on unnamed sources-that the FBI had intercepted communication between the Trump campaign and Russian officials was true. Here is Comey's answer:

It was not true. Again, all of you [Congresspeople] know this, maybe the American people don't. The challenge - I'm not picking on reporters about writing stories about classified information. That people talking about it often don't really know what's going on and those of us who actually know what's going on are not talking about it, and we don't call the press to say, Hey, you got that thing wrong about this sensitive topic, we just have to leave it there, mention the chairman and the nonsense about what influenced me to make the July 5^th statement, nonsense. But I can't go explaining how it is nonsense.

In other words, unsourced reports about classified information are most likely fake news. Not to disparage outlets that publish them, but for investors, it's important to know good, useful information from bad. Unsourced reports on items that can't possibly be verified are not a sound basis for investment decisions, period. Heck, even the media's reactions to today's events demonstrates the danger of relying on headlines for actionable information. The "news" varied widely depending on where you tuned in-all evidence, in our view, of the media's increasing tendency to editorialize and pander to an audience rather than report objectively. Biased opinions aren't useful investment information, either.

Anyway. Some rightly acknowledge this is all one big circus, but worry it will harm stocks because it distracts Congress and the administration from their long to-do list, including tax reform, health care, infrastructure and the dismantling of Dodd-Frank (which seems set to pass the House today, despite Comey's presence on Capitol Hill, but we digress). This presumes two things: 1) that the Trump Trade is real and 2) gridlock is a negative. However, as we've shown here numerous times, stocks' rally isn't about the administration or hopes for sweeping reforms. For one, we see no evidence anything the administration has proposed would be some whopping net benefit for the US economy-like all major change, it would create winners and losers. An active Congress, regardless of party or agenda, raises legislative risk. Stocks generally prefer gridlock, since it means property rights and the rules of commerce don't change. Knowing the rules enables investors and businesses to take risk.

Moreover, if stocks' rally is all about President Trump, how do you explain the S&P 500's 18.9% total return between February 11, 2016-the end of the correction-and November 8?^[iii] Virtually everyone thought Hillary Clinton would win the presidency during that stretch, and many feared the worst for stocks if she didn't. Given the amount of fear baked into the market when Trump won, and the fact he didn't really do anything to dispel fears of protectionism and other potentially stock-spooking policies until well after he took office, it rewrites history to say returns since November 8 are all one big Trumpfest. Exhibit A is the underperformance of those sectors said to benefit most from his win. Exhibit B is foreign stocks' outperformance. And Exhibit C is the big earnings boom. After all, when you own stocks, you don't own a share in the government's actions. You own a share in publicly traded companies' profits.

As we wrote last month, if the facts change and new evidence emerges making impeachment more likely, investors might have some decisions to make. Political uncertainty can be a drag. Then again, the history of market returns surrounding impeachments is mixed, not negative. For Korea and Brazil this year and last, markets cheered the presidents' impeachment and ultimate removal. Bill Clinton's 1998 impeachment trial didn't prevent gangbusters returns that year. The Watergate investigation in 1973 did coincide with a deep bear market, but there was a lot else going on then-like price controls, the oil embargo, a recession and the bursting of the "Nifty Fifty" bubble. It's fair to say Watergate contributed, in our view, but we also reckon stocks probably would have endured a bear market either way.

But we'll cross that bridge when and only if we come to it. For now, tune into the Comey saga if political theatrics are how you get your kicks.^[iv] But otherwise, it just doesn't have much use.