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Trump is dead wrong about the stock market — it won't crash if he isn't re-elected

If you are a diehard supporter of President Trump but are nervous his unique style of Oval Office leadership thus far may lead to a Democratic presidency in 2020, then best get out of all those long positions and short, short, short stocks across the board.

That is the latest succinct investing advice from the current holder of the presidential throne and resident market watcher Donald J. Trump in a dire new warning to market goers.

Trump tweeted on June 15:

It’s unclear what Trump’s definition of a market crash is — one day, six months, etc.? Does he mean a bear market unfolding over the course of a few months? Who knows, perhaps he doesn’t even know.

But taking the comments from the president at face value, he may have just called for a one day, 1987 “Black Monday” style 22%-plus cratering in stock market value on the session after the election should he not win another four years. Or, maybe, something akin to the 1929 market crash that saw stocks crash by double-digit percentages inside of two days in late October.

That’s no laughing matter, people.

Aside from there being safeguards in the financial system to prevent such meltdowns like the ones from 1929 and 1987, here is why a Trump crash in the markets is unlikely to happen.

Why a crash won’t happen

For there to be a stock market crash, there usually has to be significant excesses built up in asset classes. Then, there has to be a trigger that sends ripples throughout global markets. In effect, said trigger makes investors collectively wonder why they are paying through their nose to own a particular asset.

In the 1929 stock market crash, for example, unsophisticated investors recklessly piled into stocks because everyone else was doing it. The Federal Reserve jacked up interest rates in August 1929 to wipe excesses out of the system — by Oct. 24, 1929 Black Monday had ensued followed by Black Tuesday.

Here, the Federal Reserve’s rate hike was the trigger.

As for 1987, the Dow had exploded 44% in the first seven months of the year. By mid-October, excessively valued stocks were throttled by a bevy of negative news on the economy. Investors used that barrage of data to sell stocks at their very overvalued levels.

Here, souring economic data was the trigger.

But this time around, it’s quite hard to find excesses in the market. Further, companies are in impressive financial standing.

While markets are back to near record highs, valuations on companies are far from over-cooked. Corporate profit margins remain nicely near their peaks. Households have smartly de-leveraged their balance sheets since the Great Recession. The financial system is not a house of cards as it was back in 2007-2008. Corporate America is sitting on $1.69 trillion in cash, according to Moody’s Analytics.

“First of all, if the employment situation remains strong, the odds are pretty good that Trump will get re-elected. So if he doesn't get re-elected, it's a good bet that the employment picture will have changed by November 2020 if it turns out that Trump loses. So if the employment picture is strong enough to hold up the market, it will also be strong enough to help Trump avoid losing the election,” Miller Tabak strategist Matt Maley told Yahoo Finance.

Former Presidents from right Barack Obama, Bill Clinton, George W. Bush, George H.W. Bush and Jimmy Carter wave on stage at the opening of a hurricanes relief concert in College Station, Texas, Saturday, Oct. 21, 2017. All five living former U.S. presidents joined to support a Texas concert raising money for relief efforts from Hurricane Harvey, Irma and Maria's devastation in Texas, Florida, Puerto Rico and the U.S. Virgin Islands. (AP Photo/LM Otero)
Former Presidents from right Barack Obama, Bill Clinton, George W. Bush, George H.W. Bush and Jimmy Carter wave on stage at the opening of a hurricanes relief concert in College Station, Texas, Saturday, Oct. 21, 2017. (AP Photo/LM Otero)

“I'd also note that the last two President's to lose their attempts to gain re-election (the first Bush and Carter) were facing a weakening economy. That was followed by a recession early in the new President's first term (Clinton and Reagan). So if Trump loses, it won't surprise me if we get a weak stock market, but it will be due to a weaker economy, not the results of the election,” Maley added.

None of the aforementioned factors support Trump’s contention the market would crash if he wasn’t re-elected. Actually, they point to a market that could rally — with Trump out of office, companies could get back the certainty they crave to plan their businesses for future financial success. That could unlock economic growth. Damaging trade wars would be off the table.

Not to mention the Federal Reserve is always primed and ready to save a weak stock market, isn’t it?

“I also don't think it [president not winning re-election] will be followed by a crash... because the Fed has indicated they'll step to the plate to help things at some point,” explained Maley.

Markets will be tested

All of this isn’t to say the bull market won’t be tested if Trump isn’t re-elected.

Love him or hate him, Trump’s corporate tax cuts have served to pump up bottom lines across Corporate America. Those cuts will very likely be rolled back to support various social safety programs under a Democratic president. That could mean fewer stock buybacks and dividend increases, and less hiring — three hallmarks of Trump’s time in office that has supported stocks and the economy.

What’s more, Trump’s lax regulatory environment for businesses (especially for banks — per the norm for a Republican presidency — has done its part to support peak profit margins in Corporate America.

But for Trump to make a stock market crash call, seems over the top — even for him.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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