×

How Comey, Russiagate fallout could ruin Trump and crush the markets

  • The firing of FBI Director Comey could lead to Trump's removal from office.
  • A correction of 10 percent to 20 percent could be on the horizon.
  • With the markets vulnerable, "sell in May and go away" may be the right move.

The firing of FBI director James Comey has an eerie similarity to the "Saturday Night Massacre" in October of 1973, when embattled President Richard Nixon fired Watergate Special Prosector Archibald Cox-a move that hastened Nixon's departure from office.

We may have more than just a simple historical analog here.

I am among the few who believe that President Trump's term will be attenuated, much in the same way as Nixon's second. I can foresee many reasons why even Republicans will ultimately see an advantage in forcing Trump's resignation and working with a president named Pence.

Beyond the political ramifications, how will this affect Wall Street?

The Watergate affair, though not the only factor, weighed on the stock market for over a year adversely affecting stock prices while Watergate was simmering to a full boil.

The S&P 500 began to weaken in January of 1973, as Watergate intensified, and didn't bottom out until September of 1974, one month after Nixon's resignation.

To be fair, the world was also reeling from the first oil shock of the 1970s—the so-called the Arab Oil Embargo. In addition, rising inflation and interest rates, volatility in the value of the dollar and gold and the on-going effects of Vietnam War, which was in the process of winding down, took their toll.

But it was Watergate that was Nixon's undoing while Russiagate may now be Trump's.

"For longer-term investors, holding off on adding to existing stock market positions may make sense here, as stocks could be markedly cheaper later in the year. It seems this may well be a "sell in May and go away" type year."

If the Trump administration ultimately fails to survive the political turmoil that intensified, without warning this week, one could rightly assume that the stock market could be vulnerable to an extended pullback. It could easily suffer a 10 percent to 20 percent correction as a consequence of a constitutional crisis which may well be in the making.

As has been widely discussed, the VIX, or Volatility Index, is at a 23-year low.

That either means that everything is right with the world or the stock market has grown complacent about the risk of an unexpected event. I think the latter is the more likely scenario.

While Republican leaders have yet to push back meaningfully on a president who doesn't understand, or appreciate, precedent, I imagine they will push much harder if the House and Senate appear to be in jeopardy in the 2018 mid-term elections.

At that point, expect them to turn against this president and look to the past to find a solution in the present. Senior Republicans ultimately took the walk to the White House to tell President Nixon his position was untenable.We're not there yet, but I suspect that is the direction in which this headed.

To make matters more complicated, the president's agenda is stalled and his foreign policy, such as it is, is erratic at best, and may create additional chaos and uncertainty.

Clearly the market has enjoyed some economic tailwinds of late. But historical headwinds are on the horizon. Volatility is unlikely to remain this low with a major, and escalating, scandal brewing in Washington.

I would bet against Trump on this one and take some precautions in the market. Traders may want to protect their portfolios and simply raise cash. In addition, buying puts (a contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time) on the S&P 500 could be a profitable trade as disgruntled intelligence types leak more and more details about on-going investigations.

For longer-term investors, holding off on adding to existing stock market positions may make sense here, as stocks could be markedly cheaper later in the year. It seems this may well be a "sell in May and go away" type year.

I would put my pennies back to work when Pence becomes president. While not everyone may agree with the veep's stance on social issues, he is a stable adult with far more experience getting bills turned into laws. In that respect, tax reform, deregulation, infrastructure spending and other economic stimulants would likely have an easier time making it through Congress and on to his desk.

No doubt, I may be predicting the outcome of this political potboiler prematurely, but as we have learned through observing Donald Trump's business career, it's always best to sell first and ask questions later. In this case, better safe than sorry should be Wall Street's guiding principle.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.