Will We See a 30% Correction Due to a Trump Impeachment?

Elliott Wave Trader  |

If you've been following my analysis of the S&P 500 through the years, you know that we have called the stock market rather well. In fact, we called for the rally to 2100 in 2015, and then expected a pullback from 2100 to the 1800 region as we came into 2016. However, unlike most others at the time, we expected that pullback would set us up for a 40%+ rally in the overall index before we saw a 20-30% correction. In fact, we were calling for a “global melt-up” at the time.

And, for those that remember back to November of 2016, when everyone and their mother was certain the market was going to crash if Trump won the election, we staunchly stuck to our guns and noted that we expected the market to rally strongly “no matter who was elected to office.” And that is exactly what we got, despite the common expectation of a market crash if Trump was elected.

The news cycle has thrown one bomb at the market after another during the last three years. But the market has not cared about any of these “issues,” as it has continued to rally unwaveringly towards our long-term targets. So, let’s be honest: no one who has been investing or trading based upon geopolitics has been on the correct side of this market for years. Yet, the analysts focusing on geopolitics have certainly provided some entertaining reading about all the risks that have kept many investors on the sidelines during this major market rally.

Amazingly, many still remain hyper-focused on geopolitics even though the market has resoundingly stated that it matters not. And, if you think that any of these negative news events mattered even one iota to the market, then you have not been paying attention for the last three years. You may simply want to don your blinders, in which case you can stop reading right now.

Now, after all these years of bad news not causing even a dent in the market rally, consider that when the good news was announced that we signed a trade deal with Canada, the market topped and then proceeded to drop 10%. Even Jeff Miller, whose work I highly suggest you read in order to get a wonderful overall picture of the current state of the market, noted:

Financial news continues to be very good, and financial markets are “ugly” in the terms of many veterans. The news has everyone worried, especially since there is no satisfying explanation.

In fact, consider that the last 9% rally to the 2940SPX region was accomplished in the face of the expanding trade war with China. Yet, the market topped as soon as the trade deal with Canada was announced. How do you explain that?

As I have highlighted in the past, Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF sheds some light on an explanation:

...financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?

While you ponder what is really driving the market, I now come to a point of conjecture, which I want to address before it may occur. Again, if you have been following me closely, you will know that I am expecting a 30% correction and for the S&P 500 to revisit the 2200SPX region. And, yes, this applies regardless of whether the market can still move over 3000 in early 2019. The only question in my mind at this time is not whether we get that correction, but what the media pundits will blame that correction upon.

As I have said so many times before, I am an analyst, and not a prophet. So, I am unable to tell you what the news of the day will be at the time. But, I can assure you there will be some news cycle to which the pundits will certainly point to explain the market decline.

You see, there is always going to be some news to point towards whether the market goes up or down. And when the market moves in the opposite direction from what most would have expected based upon the substance of a major news event, the pundits will simply look for another news event to explain why the market moved in the opposite direction of what the major news event would indicate. Or they simply claim the market “sold the news,” or that it “is not trading based upon fundamentals at this time.” Does any of this sound familiar with regard to the intellectual dishonesty that is ever present in most pundit reports?

This brings me to my point of conjecture. I wonder if a Trump impeachment proceeding is in our future in the House of Representatives.

Before I go down this rabbit hole, I want to strongly note that my point is not to say the president deserves to be impeached. Personally, I do not see anything he has done as rising even close to the level of an impeachable offense.

Rather, I simply understand that this is a political process and truth is not always the driver of political processes. Yet, if an impeachment proceeding is initiated, I am quite certain that the pundits will quickly and confidently point to this as the reason for the 30% market correction I am expecting as we look towards 2019. And, if they do, allow me to explain why they are full of hot air.

The narrative will certainly play out as follows: The market likes certainty and stability within our government. (Please ignore that this was the same reason many claimed that the market was going to crash if Trump was elected.) However, an impeachment proceeding places us in a very uncertain and unstable situation within our government. Therefore, the market will react negatively to that uncertainty.

It sounds reasonable, right? It makes sense, right? It sounds logical, right?

There is only one problem with such “reason,” “sense,” and “logic:” Why did the market rally 10% during the Clinton impeachment debacle?

Does impeachment not cause uncertainty or instability when it is a Democrat being impeached, whereas it will cause uncertainty or instability when a Republican is impeached? Yes, this is a rhetorical question. So to those of you that want to make this a partisan issue or to make it an issue specific to Trump, please spare us the commentary that we can all go to the Yahoo boards to read. I am simply pointing out the foolishness and inconsistency within this line of thinking.

While I clearly am unable to know in advance what the news cycle will be once we drop to our targets for a 30% correction, I do know that some news will likely be blamed. But, if an impeachment hearing is to be blamed, there will be many questions that market pundits will have to answer. While a decline based upon impeachment may sound like a nice narrative, it does not provide an intellectually honest reason for a market decline based upon market history.

Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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