If you’re interested in staying updated on the evolving political scene, you might want to check out the White House Watch newsletter—especially with the 2024 US election around the corner. While we at Alphaville usually steer clear of political debates unless they directly impact finance, the current climate is becoming harder to overlook.
It appears the financial sector, particularly on the sell-side, is also becoming more vocal about these political tensions. They’re treading carefully though, to avoid becoming the next target of Washington’s ire. Credit goes to Evercore ISI for tackling a topic many in the investment community are pondering but few are willing to address out loud.
Evercore’s recent report sheds light on the mounting legal battles faced by the Trump Administration. They point out that with over a hundred legal challenges against executive actions, tensions between the Executive and Judicial branches are reaching a boiling point. Historically, even when not thrilled about it, the Administration has generally complied with court orders—albeit reluctantly. This has included reopening the CFPB, rehiring terminated probationary federal workers, and making efforts to settle some USAID claims.
However, this week things took a provocative turn. The Trump Administration came close to outright defiance when deportation planes took off right as a district judge was questioning their legality. This tension escalated to the point where President Trump suggested impeaching the judge, prompting Chief Justice Roberts to publicly criticize the idea, reinforcing that impeachment isn’t a suitable response to judicial disagreements.
The unfolding events hint at a looming crisis where the Administration might resist a Supreme Court order. Traditionally, presidents comply with Supreme Court rulings, even when substantial. Ignoring a Supreme Court decision would take us into unprecedented constitutional territory.
Markets have overlooked signs of the US’s waning political and legal stability before, but a constitutional crisis is an entirely different beast with potential market consequences. The key lies in the details of the case.
While markets might dismiss legal tussles over certain issues, a direct challenge to a court order that impacts substantial government spending or undermines the judiciary’s role in upholding contracts could lead to a negative market reaction. These systems are pillars of the US free market framework.
Evercore’s report digs into the history of clashes between the US judiciary and executive branch, examines active cases, and questions whether US Marshals can fulfill their judicial duties in these heated times. This is where we find ourselves.
For Alphaville readers, the crux is Evercore’s market outlook amidst these tensions. The investment bank observers note that markets have largely turned a blind eye to the gradual breakdown of US legal and political standards. Another standoff among the nation’s key powers might simply add to the background noise, appearing less threatening than trade tariffs, for instance.
Evercore concludes that how and when markets react hinges on the specifics of the case. However, an insidious risk lingers — the gradual breakdown of global confidence in US stability and security. If President Trump were to defy the courts, say under the Alien Enemies Act of 1798, to deport suspected gang members without due process, market upheaval might be minimal, since the issue isn’t economic at its core, despite raising some concerns.
Yet, should Trump disregard a court ruling on a fundamentally economic issue, such as a directive to compensate a government contractor for completed work, that might rattle the markets more. Even as core democratic and legal norms have faced tests recently, the US judicial system remains a vital mediator in economic and commercial disputes, upholding the free market system. Flouting court orders related to payments or contracts suggests the US government might not adhere to the rule of law.
Even if these disputes involve relatively small financial stakes and the Administration again claims extenuating circumstances, markets could look past it. However, it’s worth recalling that a top economic official from the Administration has considered the notion of defaulting on Treasuries. For markets, ignoring a refusal to comply with court-ordered payments or contracts presents the chance of a precarious path.
Whether the market response would be immediate following a significant incident or gradually build up is uncertain. Regardless, diminishing market confidence in US reliability and security could have substantial economic effects. As noted by our former Evercore ISI colleague Ernie Tedeschi, currently the Director of Economics at the Yale Budget Lab:
“The US benefits from a safe harbor investment premium, reflecting the value investors place on US stability. Even a small shift in risk premia could dramatically influence the US economy. If the US risk premium aligned with the UK’s current level, after a decade, real equity wealth per household would potentially decrease by $50,000, with real GDP shrinking by 1%.”
With numerous lawsuits against the Trump Administration speeding through the courts, there will likely be ample opportunities to see how resilient the markets remain on this issue.
Indeed, it seems that’s where we’re headed!
