Why Gary Cohn's resignation from Trump administration rattles Wall Street

Adam Shell | USA TODAY

Show Caption Hide Caption Gary Cohn to resign as economic advisor for President Trump Top Trump economic adviser Gary Cohn is leaving the White House after breaking with President Donald Trump on trade policy.

Wall Street has something new to worry about: the resignation of a market-friendly adviser at the White House.

Gary Cohn, the chief economic adviser of President Trump, stepped down from his post after the president opted last week to slap tariffs on steel and aluminum imports, a decision Cohn was not in favor of.

More: Jeff Bezos' wealth is now equal to 2.3 million Americans'

More: Feds, defense lawyers clash over pharma bro Martin Shkreli's recommended sentence

More: Double taxation? These 13 states tax your Social Security benefits

The initial market reaction to Cohn's departure was negative, as the ex-Goldman Sachs executive was viewed as a pro-business and pro-free trade policy maker. Cohn was also instrumental in getting the landmark tax cut plan passed in December. That plan, which slashed the corporate tax rate to 21% from 35%, will help corporations boost profits, and has helped drive up stock prices.

In pre-market futures trading, the Dow Jones industrial average was down about 250 points, or 1%.

Cohn was well respected on Wall Street and his departure creates fresh uncertainty as to whether Trump will move toward a more protectionist trade policy and who will replace the outgoing adviser. His departure comes at a time when the stock market is already worried about the risk of rising interest rates and fears of a global trade war.

"Cohn is thought of as pro-business and was against the tariffs," says Bill Hornbarger, chief investment officer at investment firm Moneta Group. "I think his resignation injects a level of uncertainty in terms of who will be the most influential economic adviser and what that person's agenda will be. That could be troublesome for the market until it is cleared up."

Tariffs are viewed negatively by Wall Street, which fears it will cause other countries to retaliate and spark a trade war that will hurt the U.S. and global economy.

More: Trump Bump is down but not out after stock rout

More: Stock market 10-month win streak ends in February after correction

More: Warren Buffett letter: 3 tips for stock investors

Other reasons why Cohn's exit worries Wall Street:

Loss of steady hand

Cohn was viewed as a steady, credible voice at the White House that had Wall Street's best interests at heart. He was viewed as the so-called "adult in the room," in a chaotic White House, says Axel Merk, chief investment officer at San Francisco-based Merk Investments. But now, "adult supervision is gone."

Could signal rising protectionism

Cohn was a big believer in globalization, a moderate and a free-trade advocate. But his exit could mean that Trump and other close advisers who favor more populist, or pro-American, policies might move farther away from current open-trade thinking.

In short, Cohn's leaving could open the door to more protectionist policies.

"The protectionists apparently have won, and that's not a good story for the markets," says Greg Valliere, a Washington policy analyst at Horizon Investments.

Angst over his replacement

"Cohn's exit raises doubts about market-friendly voices," wrote Ian Katz, of Capital Alpha Partners. "More than anyone else in the White House, Cohn had credibility with the markets. He speaks Wall Street's language, and the banks trusted that he would share finance-favorable positions with the president. Now that he's out, the question is who takes the mantle?"

If Trump replaces the outgoing Cohn with another "free-market champion," investors could get over his loss quickly, Katz wrote. But if it takes time to replace him, "investors will get edgy."

Hornbarger sums up Wall Street's latest risk this way: "I think what the market doesn't like is the general unpredictability of the Trump administration."