The Gary Cohn Rally and Stock Markets Under Trump

Immediately prior to the 2016 election, I gave two warnings to friends and readers. First, based on poll results from the FiveThirtyEight website, it seemed Trump had a good chance of winning the election.

Second, I warned that a Trump election would devastate the stock markets. This conclusion came, in part, from the writings of Dartmouth professor Eric Zitzewitz and Michigan professor Justin Wolfers, who monitored the movements of the stock market in relationship to presidential polls, and concluded that the markets believe Trump would destroy 10 percent of the outstanding value of all publicly traded companies. Wolfers and Zitzewitz were joined by The Economist magazine, which cited a Trump victory as one of their top-10 risk events that could damage security and prosperity in America and the world. In the runup to the election, hundreds of leading economists wrote a scathing analysis of how Trump would erode America’s prosperity. Business leader Mitt Romney, the Republican Party’s presidential nominee four years ago, explained that: “If Donald Trump’s plans were ever implemented, the country would sink into a prolonged recession” by triggering a trade war with other nations. Moody’s Corporation, which provides analysis for investors, studied the contrast between the economic plans of Trump vs. Clinton’s, and concluded that Trump’s presidency would “significantly” weaken the economy, driving America into a lengthy recession with nearly 3.5 million job losses and a 7 percent unemployment rate (vs. 5 percent today). And those were only his stated plans, not including his potential for erratic and dangerous reactions to conditions. For instance, during an interview with CNBC during the campaign, Trump suggested that the United States should threaten bankruptcy to stiff owners of Treasury bonds. As analysts from the left, right, and center pointed out, this idea would trigger an immediate global economic crisis.

I did not just issue these warnings, I also heeded them. Although I had never previously been an active investor in the public capital markets, these conclusions motivated me to personally move resources into savings and short options to hedge against the risk that Trump would win. Many of my friends did the same.

Then, of course, Trump won. And although stock market futures initially plummeted, they recovered quickly. In August 2017, the Dow Jones Industrial Average broke through 22,000 for the first time, up 22% since election day.

Lessons from “the Trump Rally”

For those of us who bet that Trump would trigger a market collapse, what lessons can we learn?

First of all, never underestimate the raw power of corporate behemoths, like banks and oil companies. Trump’s initial agenda included massive deregulations of large banks as well as rollbacks on energy companies. The promise of these policies, and the potential for hundreds of billions of dollars of investor stimulus, represented a huge part of the rally after Trump was elected.

Second, even when Wall Street realized that Trump would not deliver on his policy agenda, the capital markets kept coasting on general pro-growth conditions that dated back many years. Stock markets today are “flushed with central bank liquidity and boosted by moderate growth,” as The Financial Times noted.

But mostly, it’s Gary Cohn and the Cohn Trade driving this Cohn Rally

All that said, the stock markets really seem to value Gary Cohn, the former President of investment bank Goldman Sachs who serves as Donald Trump’s chief economic advisor. Goldman Sachs, the world’s most powerful and famous investment bank, generally refused to loan money to Trump when he was a businessman, considering him a con artist and a grifter. When Trump became President, however, he and his team sought Goldman Sachs alumni to staff his White House. Among the Goldman Sachs alumni in Trump’s inner circle are Treasury Secretary Steve Mnuchin; economic advisor Dina Powell; and former White House strategist Steve Bannon. All of them, however, were in over their heads compared with Gary Cohn, who allegedly checks all of their work. Under Cohn, according to a recent profile, the National Economic Council “stands out from the rest of Team Trump because it is comprised of people who actually know what they’re doing.”

But even the politically parochial barons of Wall Street are starting to worry. Gary Cohn is not a lock to stay in the White House. He has begun to openly criticize Trump’s incompetence and racism, and open criticisms are one thing this administration cannot stand. Management guru Jeffrey Sonnenfeld recently said that a Cohn resignation would “crash the stock markets.” Jake Novak has described Cohn as “the most important man in Washington.”

To be sure, we should note that the markets under Trump have offered a lesson in humility. Specialized experts, and entire large funds, work hard to process and gain an edge in the game theory, mass psychology, and raw information involved in public capital markets. People like me who are not full-time professional public markets investors should be leery of making unusual bets in any direction. Public capital markets are really hard to navigate, and most pundits get them wrong. My personal experience is in political science, business leadership at nonpublic companies, and venture investing in nonpublic companies, none of which give me special insight into public markets investing. My only prior bet in this area was wrong. But, with a madman as President and the only adult in the room eyeing the exits, it sure doesn’t seem like a good time to plow money into the open markets.

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