No. Gary Cohn’s Exit Would Not Crash the Stock Market

The stock market is not going to crash if Gary Cohn abandons his White House post.

The stock market fell on Thursday after the mass rebellion of Corporate America’s CEOs. It was the biggest stock market decline in three months. It broke a four day streak of markets going up, even while the media gnashed its teeth over Trump’s response to Charlottesville. But it was, in the big picture of things, a pretty small decline. The Dow Jones Industrial Average fell by 1.24 percent.

Yet on Thursday Yale School of Management professor Jeffrey Sonnenfeld told CNBC that the market would crash if Cohn resigned his position as the director of President Donald Trump’s National Economic Council.

There’s almost no plausible scenario where that could be true. No theory of stock market valuation supports the idea that a guy with a back-office job at the White House is responsible for stock market prices. If you think stock prices reflect expectations of future corporate earnings, how would Cohn change those? Is Amazon or J.P. Morgan Chase or Merck going to see profits fall because Cohn decamps the White House for Wall Street? If you think it is all about risk premia, how would a Cohn exit suddenly change the price investors put on risk?

As a thought experiment ask yourself if you believe that investors, hedge funds, mutual funds, and people saving for retirement are likely to change their views of equity prices if Cohn were to decide that his “disgust” at the president’s remarks meant he could not longer work in the White House. If the market really were as fragile as that, wouldn’t it already be crashing? Has the big runup in stock prices since election day really turned on Cohn?

Of course not.

Sonnenfeld is not a market guru by any measure. He has no skin in the game. He is an ivy league professor of management. He understands certain things very well, including how to deal with top executives at companies. He wouldn’t be a bad guy to consult if you were going into a negotiation with Donald Trump.

But he is not an expert on market valuations or fluctuations. He’s speaking out of school.

Here’s how Barron’s magazine, which has a much better record when it comes to watching the market, described Sonnenfeld’s view:

That sounds like a bit of an overstatement, perhaps even wishful thinking on Sonnenfeld’s part. Sonnenfeld has been friendly with the Clintons in the past, particularly former president Bill Clinton.

The truth is that no one can tell you what the market will do on any given day. But the idea that the market would crash in the absence of Cohn is not plausible. It will do what it will do no matter where Cohn hangs his hat.