Wall Street – What next for a nervous American bull market

The S&P 500 index has risen more than four times since it bottomed in March 2009 at 666 (the Biblical devil number!) in early 2009 after the trauma of Lehman’s failure and the global financial crisis. Valuations are now expensive, an eighth Fed rate hike is imminent at the September FOMC and emerging markets are in distress from Turkey to Argentina, Russia to Brazil. Now that Trump’s personal attorney and campaign manager are both convicted criminals, the risk of Presidential impeachment has never been higher.

History is a poor guide on this subject. The US stock market fell 20% in 1974, the year of Watergate and Richard Nixon’s resignation. Yet 1974 was also the year of the post Yom Kippur War, Arab oil embargo and stagflation in the US. The market did squat in the Bill Clinton’s impeachment trials of the late 1990’s amid the dotcom boom.

I agree with Trump’s own forecasts that the stock market will crash if he is impeached, even though his approval rating was a dismal 43% even before Cohen’s guilty plea and Manafort’s conviction. In fact, while Justice will not indict an incumbent President, Trump could face jail if he is booted out by the Senate. The Republican Party has not abandoned him yet but could well do so if and when the stock market crashes.

The S&P 500 index made a double top on Tuesday, scaling but then closing below its January record of 2873. This is an ominous sign as double tops preceded both the dotcom bubble flameout in March 2000 and the 2008 financial crash. Is it prudent to write the requiem for the aging bull market in American equities? Yes, even if the volatility Index, Wall Street’s pendulum of greed and fear, grossly misprices risk at 12. Even though I do not see a 50% bear market collapse as there is no real recession risk (ignore the flattening yield curve in an age of central bank quant easing and offshore buying of long duration US Treasury bonds), I can easily envisage a 15 – 20% hit on the S&P 500 index if Trump get impeached. This will be reminiscent of the market mini meltdowns in 2011 (the US loses its AAA credit rating) or 2015 – 16 (China spreads, global contagion with a botched yuan policy shift). My Zodiac sign is Leo but I feel more pussycat than leonine in my current stance on risk and the global markets. Price is what you pay, value is what you get and I am no longer prepared to pay the price for an expensive US stock market at an ugly twist in world history. Cash in the bank never felt so good as I watch the tides go out in Wall Street and the global markets. I trade money for a living, for intellectual fulfilment and, yes, even deep passion. This is the time to reduce, not embrace risk.

Healthcare has been the second best performing index sector of 2018 after technology, led by Big Pharma shares. The sector is defensive, the political risks of Obamacare fell after Trump pledged to repeal it, earnings revisions have upward momentum share buyback have goosed EPS and valuations are not nosebleed like Big Tech and a rollback in FDA regulatory rules though drug prices remain a hot potato in an election year. I like megacap pharma shares with broad drug pipelines, attractive patent moats, restructuring catalysts and operating leverage. This leads me to Merck, Pfizer and Amgen in Big Pharma. If markets get ballistic on impeachment risk, put option selling is the strategy de jour since it is insane for new money to buy Merck at 69 or Pfizer at 42 now that the easy money in both companies has been made.

At 174, Facebook is now once again the most mispriced major FANG name at 17 times ex cash forward earnings. True, Facebook has been hit by guidance on compressed margins, Apple’s decision to drop its app from the App Store and angst over political hacking and the data privacy backlash. I concede Facebook can easily drop to its 52 week low of 149 if NASDAQ gets slammed by a Mr. Market’s crazy mood swings this autumn if Trump gets impeached but I am convinced that the world’s biggest social media network and human communications platform is undervalued relative to its 25% revenue/earnings growth potential. Wall Street does not value the growth engines that are Messenger, Instagram and WhatsApp, each with a billion active users. But when it will, Facebook will sizzle and rise to 210.