Will Trump Cause a Stock Market Crash?

The intensity of the investigation into President Donald Trump's campaign continues to stoke fears of a potential stock market crash in 2017. Although it's never possible to exactly predict when a stock market crash will start, it is always prudent to be prepared for one just in case.

The S&P 500 has fallen 2% since the opening bell on Wednesday (April 17), after news broke that President Trump asked the FBI to end its investigation into his former National Security Advisor. The Department of Justice ratcheted up the investigation by appointing a special counsel to investigate Trump's campaign and its ties to Russia yesterday evening.

The attempt to scuttle the FBI's investigation could be considered obstruction of justice, which is taken very seriously in Washington. Impeachment is now being discussed as a possibility by some members of Congress. On Tuesday, when CNN's Wolf Blitzer asked Sen. Angus King (I-ME) if impeachment is on the table, King said it is.

"Reluctantly, Wolf, I have to say yes, simply because obstruction of justice is such a serious offense."

stock market crash

The political turmoil has rattled the stock market. The sell-off could be a sign Wall Street is losing faith in President Trump's ability to pass his economic agenda.

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The Dow rocketed 15% higher between Election Day and Tuesday, before the latest news broke. Stocks surged thanks to Wall Street's expectations that President Trump's policies, including tax cuts and a $1 trillion infrastructure plan, would boost economic growth.

"[Wall Street banks] are betting that Trump and the Republican-led Congress will get the job done and cut taxes and regulations," wrote CNN back in December.

will trump cause a stock market crashThe scandal surrounding the president is putting an end to that optimism. That by itself might signal a stock market crash in 2017. But the controversy in the White House could create a climate of uncertainty that goes beyond stalled economic plans. Take a look at how much the VIX rose yesterday.

The VIX - often called Wall Street's "Fear Index" - jumped 45% yesterday to 15.42, its fifth-biggest one-day jump ever. The highest ever single-day jump in the VIX came in February 2007 as the housing bubble collapsed, eventually leading to a stock market crash in 2008.

And things could be even worse this time around. Here's how President Trump could cause a market crash in 2017...

Will Trump Cause a Stock Market Crash as Controversy Grows?

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The news about President Trump and Russia might pull the rug out from under the "Trump rally," but that's not the only concern. Stocks are at or near record highs. If traders panic, the record highs could fall back to earth and kick off the next stock market crash.

Right now, stocks are at their highest valuations since the 2008 stock market crash. The Shiller P/E ratio, a famous measure of stock market value, is currently 73.8% above its historical average. At a ratio of 29.2, that's even higher than it was before the 2008 stock market crash, when it got up to 26.7 in December 2007.

It's no surprise stock market valuations are so high either. Stocks have been riding a bull market since March 2009. That's sent the Dow up over 200% since then. But the Trump rally since Election Day rocketed them even higher.

Since Trump won the election in November, the Dow has been smashing record highs, including jumping through the 20,000 and 21,000 levels in the fastest 1,000-point run in its history. The S&P 500 and Nasdaq both closed at their all-time high earlier this week (May 15).

Stocks near all-time highs and at historically high valuations could correct back to more average valuations and traditional growth rates. But they could also signal an oncoming destabilizing event that could crash the market.

That's why stocks are falling sharply after the latest revelation in the investigation into President Trump. Not only are traders concerned he won't be able to pass his economic reforms, but they're concerned serious charges might be filed against him, or that he might even be impeached.

Charges or impeachment hearings would ratchet up uncertainty over the political system, and traders and investors alike might flee stocks in search of stable alternatives. When that uncertainty gets coupled with record-high valuations, the market could tank. That's why we want Money Morning readers to be prepared for a market crash.

We've put together a strategy showing our readers how to protect their money during a stock market crash. Panicking is one of the worst things an investor can do during a market crash. With our guide, investors will be able to protect their hard-earned money, and they can even profit too. Here's our guide on how to keep your money safe from a market crash...

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