What If Trump Resigns?

Media has begun to buzz with speculation about a Trump resignation before his term ends.  The talk is short on specifics.  Some sources anticipate impeachment.  Others simply imply that he might grow frustrated or bored and step away from his duties.  Given the political biases of most of these media sources, the buzz may reflect wish fulfillment more than analysis.  Still, even if the event is not especially likely, a consideration of how the markets might respond could nonetheless offer insight.

In general, it is hard to see how the markets would take it well.  Whatever investors think of Trump, the individual, they clearly like his plans for tax reform, regulatory relief, and infrastructure refurbishment.  The rally since the election speaks to such feelings.  Should a resignation thwart progress on any of these fronts, markets would retreat.  On top of such disappointment, resignation would impose great disruption and uncertainty, neither of which goes well in capital and especially equity markets.  If Trump were to resign in favor of policy continuity, likely under Pence, the event would do much less market harm than if his resignation promised entirely different policies.  If the resignation were anticipated, market action, however severe, would occur beforehand.  If the resignation were a surprise, the market would react violently during the weeks directly following it.

Nixon’s resignation in August 1974 is the only historical reference available.  In some respects, it hardly applies.  Markets looked to Washington for very different policy guidance then.  They had faced oil embargo in 1973 and oppressively high oil prices from which the wanted relief.  Otherwise, investors then looked for fewer economic policy initiatives than they do now.  Still, the uncertainty associated with the loss of the president had its adverse impact.  Since Nixon’s fall was anticipated in one form or another for an extended time before the resignation announcement, much of the damage occurred before the fact.  Stocks fell some 24 percent between January 1974 and August, when he finally left the White House.  They continued down an additional 22 percent into September, after which Ford’s assurances of policy continuity, as well as relief from uncertainty of exactly what would happen, permitted a rebound of sorts.

If Trump’s resignation were to come as a surprise, the Nixon experience would have little applicability.  Rather than give ground gradually over months of anxiety, the sudden onslaught of uncertainty would likely cause a crash.  Even if a successor, presumably Pence, promised policy continuity, the retreat would almost surely have a violent character, perhaps a stock market loss of 30-40 percent in the space of 4-8 weeks, maybe more even faster.  Certainly that would more than wipe out the Trump rally since the election.  Once the new administration, again presumably under Pence, established a commitment to continuity, a rebound of sorts would likely begin, faster on any demonstrated ability to implement the market’s desired agenda.

A much more complex scenario would develop if the resignation were to suggest radical policy changes.  It is, however, hard to envision how such a thing happening.  Even if Pence were to resign with Trump, the power would devolve to Speaker of the House Paul Ryan, who, though he would surely assume a different tone than Trump, would not vary the policy agenda much.  The entry of Democratic leadership is highly unlikely.  The constitution makes no provision for the kind of snap election of the sort common in parliamentary systems.

It is, of course, conceivable that a Pence or a Ryan could use his new found power to advance a previously hidden and radically different policy agenda.  Stranger things have happened.  In such an admittedly unlikely event, a rebound would hinge on the elements of that different agenda.  To the extent that it improves on the policies that markets have endorsed over the last few months, any recovery from initial losses would, as they say, “have legs.”  To the extent that those different policies dashed the hopes that have sustained the recent rally, the retreat would extend further for longer.

At the present time, such speculation has an unavoidably fanciful aspect.  It asks as many questions about subsequent events as it answers about a resignation.  Still, it is a worthy exercise if only to frame likelihoods and remind all that markets ultimately respond to policy more than to the person behind the desk in the Oval Office.

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