Robert Mueller could be the markets' biggest wildcard in 2018

Greg Valliere is the chief global strategist at Horizon Investments.

Donald Trump is about to win his signature issue — tax cuts — but the outlook for
next year isn’t as bullish in Washington as it was this year.

If the tax cuts are the dessert, there’s still a big plate of broccoli to swallow: That’s the budget, where Democrats are determined to thwart Trump. It’s still unclear whether a budget can pass before this Christmas — still another extension, into 2018, is possible — but in any event one thing seems very likely: Spending and deficits are headed higher, which will put pressure on new Fed Chairman Jerome Powell to raise rates at least two or three times next year.

The likelihood of much higher deficits will prompt angry House conservatives in the Freedom Caucus to demand budget cuts when the always-contentious issue of raising the debt ceiling arrives in March or April.

FILE – In this Oct. 28, 2013, file photo, former FBI Director Robert Mueller is seated before President Barack Obama and FBI Director James Comey arrive at an installation ceremony at FBI Headquarters in Washington. (AP Photo/Charles Dharapak, File)

On both the debt ceiling and the 2018 budget, Republicans can’t get their way in the Senate, as they did with only 50 votes in special circumstances like the tax bill. They will need votes from Democrats in both houses — and the Democrats will extract concessions.

The major deal will be some type of exchange such as much higher Pentagon spending in a trade-off for modestly higher domestic spending. The deficit, which no one seems to care about anymore, is headed significantly higher.

There may be a limit to more spending, which makes us doubt whether an infrastructure bill can pass next year; no one can figure out how to pay for it. Likewise, a wall with Mexico is something the government can’t afford — or Democrats will approve.

Several other issues — including the potential demise of free trade if NAFTA is scuttled — may be dwarfed by what appears to be the dominant topic of 2018: Robert Mueller’s widening probe of the Trump Administration’s involvement with the Russians.

There’s a growing consensus in Washington that once Republican lawmakers get
what they’ve always wanted — a tax bill — they won’t need Trump for much else.  And besides, most of them are scathing (in private) toward him.

So the estrangement between Trump and his own party could intensify, especially if Mueller comes up with explosive charges that involve the president’s inner circle.  Nervous GOP candidates will distance themselves from him ahead of the fall elections.

Needless to say, every policy debate and pronouncement in Washington in 2018 will be geared to the upcoming election. Democrats have a chance to gain the 24 net seats to recapture the House, but they have so many shaky incumbents in conservative states that the Senate probably will stay under narrow Republican control.

The election is a long way off; much will happen between now and then. The economy could be even stronger a year from now, with the unemployment rate well below 4%.  Geopolitical shock waves could occur in Korea or the Mideast. But the biggest wild card is Mueller, who could shake up the city and the markets.

Is impeachment likely if Mueller piles up indictment after indictment? Getting 67 votes in the Senate to convict still looks like a high bar to clear, so chances of Trump’s ouster are only fair. But the chances of his ouster are not zero.

See also:

How America’s crazy politics could finally rattle the markets