What might 'President Pence' mean for financial markets?

“I have never been a quitter,” president Richard Nixon told the American public on the night of August 8, 1974. Moments later, as we all know, he announced that he would resign the presidency.

The immediate market reaction was muted, with the S&P 500 declining barely 1 per cent the day after Nixon’s extraordinary Oval-Office address. Over the next three weeks, however, the index dropped 13.4 per cent.

Undercut by recession and a crippled presidency unable to respond to economic headwinds, the US index ended 1974 down 42 per cent from its January 1973 peak, remaining in a slump for nearly the entire decade.

Drawing historical parallels is always hazardous. The US economy today looks nothing like it did in the recessionary early 1970s – when the OPEC oil embargo contributed to two years of devastating stagflation.

Indeed, an alternative scenario can be found in the 1998 impeachment of Bill Clinton, which pushed the S&P 500 down almost 20 per cent until it became clear that a recession was not around the corner. Markets then recovered to new highs. 

Chaos theory

Fast forward to the present, where investors are increasingly restless about the chaos in Washington. President Trump does not seem able to focus long enough to address the challenge of governing, and has been badly weakened by a series of self-inflicted wounds.

The appointment of a special prosecutor could help calm Washington and give Trump the opportunity to focus on passing new laws, or at least provide Congress the room to do so. But such legislation is unlikely to pass unless the administration appeals to the centre and gets at minimum a few Democrats to compensate for Republican divisions.

While they have a majority in Congress, the Republican Party is not a monolithic block: discipline is weak, with congressmen (and women) generally demonstrating a greater bond to their home district than to the party, and already showing that they will not blindly follow the president’s commands. 

While a limited number of individuals companies have benefited from Trump’s executive actions, major firms were counting on a reform of the corporate tax code and the opportunity to bring home cash parked overseas. The boost from a – badly needed – major infrastructure plan was also something the markets anticipated.

These are issues that could pass Congress, if they are framed in a way that both parties can accept and if Mr Trump can stay out of the news for the wrong reasons. If the near future brings a legislative stalemate and continuing chaos, however, markets will remain restless.

President Pence?

If Trump were to resign or be removed from office, that would trigger a succession process outlined in the US Constitution, elevating vice president Mike Pence to the country’s highest office.

Anticipating what President Pence might do forces us to look at both personalities and policies. Mr Trump and the soft-spoken Mr Pence, 57, are very different. Mr Pence, a traditional politician, has described himself as “a Christian, a conservative and a Republican, in that order”.

While the two men diverge on a number of policies – at least before Pence became vice president – they also have a fair amount in common

Elected to the House of Representatives in 2000, Mr Pence arrived determined to slash federal spending and shrink the role of government. After serving six terms in Congress – including as a member of the socially and fiscally conservative Tea Party Caucus – he became governor of his home state of Indiana.

In that role, Pence signed the largest tax cut in the state’s history, including a repeal of the inheritance tax and reduced taxes on corporate income and business property. At the federal level, Trump has likewise proposed eliminating the inheritance tax, while also slashing the corporate tax rate from 35 per cent to 15 per cent.

The expectation of continuity in this regard would go a long way toward reassuring markets in the event of a constitutional crisis, as would Pence’s track record of promoting infrastructure investment.

In 2015, then-governor Pence unveiled a $1bn infrastructure investment project – which he called his “21^st Century Crossroads Plan”– to be financed by the existing sales tax, bond refinancing and state reserves. In the end, he got just a fraction of that after the local legislature balked at the price tag, which represented just 0.1 per cent of Mr Trump’s so far unrealised $1tn national infrastructure plan.

Freeing trade

While the two men appear aligned on taxes and infrastructure spending, Mr Pence is a longtime supporter of free trade, unlike the avowedly protectionist president.

In Congress, Mr Pence opposed tariffs on imported goods (which Mr Trump has repeatedly threatened to impose), while aggressively supporting the Trans-Pacific Partnership (which Mr Trump abandoned by executive order) and the North American Free Trade Agreement (called “the single worst trade deal ever approved in this country” by the current US president).

Consequently, a Pence presidency could prove a tremendous relief to companies and countries dependent on international trade. And while Mr Trump has dialled back many of his threats to unilaterally rescind a range of important commercial treaties, the outlook for international growth would nevertheless likely improve under a far less nativist administration.

In that regard, it is worth noting, too, that the two men differ on immigration policy, or at least did in the early days of the presidential campaign, when Mr Pence tweeted that “calls to ban Muslims from entering the US are offensive and unconstitutional”.

It is of course uncertain to what degree Mr Pence might revert to his earlier positions if he became president. It nevertheless seems likely that we would see meaningful policy changes in such areas.

Finally, unlike the billionaire property developer, Mr Pence is not rich.

According to his most recent filing with the Federal Election Commission, his family’s income from January 2015 through August 2016 was $173,000, all from his salary as Indiana governor. Mr Pence’s other assets included a bank account worth no more than $15,000 and two education savings plans, totalling less than $30,000.

Personal income aside, the fact that we are speculating about a Pence presidency just four months after Mr Trump assumed office marks how unprecedented these times are.

With astonishing news breaking on a daily basis, almost any prediction risks becoming outdated before it can be published. It remains clear, however, that ongoing developments in Washington, however unpredictable, can have a major impact on financial markets.

Paul Broholm serves as Amsterdam-based chief investment officer at Theodoor Gilissen, a member of KBL European Private Bankers, which operates in the UK under the name Brown Shipley