I started studying this issue a while ago, because it seemed to have some inevitability. So here we are. The United States House of Representatives formally launched an impeachment inquiry into President Trump. No surprise, Republicans pushed back immediately. Senate Republicans vowed to quickly squash any articles of impeachment if they pass in the House. Republicans have the votes to stop it in the Senate.
I plan not to discuss the politics of this issue. I don’t choose to discuss the legality or legitimacy of the issue either. There is plenty of that going on anywhere and everywhere you look for it. We focus on facts and interpret them. My goal is to outline the implications for investors and discuss the possibilities of what to expect. Quite simply: What impeachment might mean for the Market.
First things first. The primary driver of stock prices are earnings. The primary drivers of the Stock Market are earnings cycles and economic cycles. They almost always overpower politics. That said, politics clearly have influence on price action from time to time.
Since George Washington was unanimously elected our nation’s first President in 1789, only two Presidents have been impeached. Andrew Johnson was the first American President to be impeached in 1868. The second was Bill Clinton in 1998. Both Presidents were acquitted and stayed in office. Richard Nixon was not impeached. An impeachment inquiry was started. Nixon faced possible impeachment for obstruction of justice, abuse of power, and contempt of Congress during the Watergate scandal. He resigned on August 9, 1974, before the House could vote. So there is clear precedent for such an event. The results had similar characteristics, but different outcomes.
For perspective, the S&P 500 fell 5% on October 8, 1998, the day the House voted to begin impeachment proceedings against President Clinton, before trimming losses to end the day down 1%. By the time Clinton was acquitted by the Senate in February 1999, the S&P was up 28%. Keep in mind, these were amongst the strongest years of the Dotcom days. The Clinton experience is particularly interesting because the Stock Market had already been hit hard before the impeachment proceedings. The S&P 500 fell that summer nearly 20% in the wake of the Asian Crisis, Russian default and Long Term Capital Management collapse. It set up a powerful rally driven by an accelerating American economy and the internet craze, largely ignoring the events in Washington.
Markets sort of shrugged off the impeachment inquiry announcement against President Nixon on February 6, 1974, but the S&P 500 fell roughly 30% until his resignation later that year. During the Watergate scandal, stocks had already been in Bear Market mode and kept falling after the formal inquiry process started. The driving force for the Stock Market decline was the Oil Shock and Embargo toward the end of 1973, which led to an economic recession. The Oil Shock delivered both recession and rising inflation in 1974, and a massive stagflation-driven sell-off in both Stocks and Bonds.
Since Andrew Johnson’s impeachment preceded the Dow Jones Industrials Index by 30 years and the S&P 500 by nearly 90, there isn’t much to work with on its impact on the Stock Market.
With the longest ever American economic expansion already maturing, currently in its 11th year, an obvious risk is this new impeachment episode slows deals on trade and negates any bipartisan agreements ahead of the election next year. Growth is already slowing. After a decade of gains to all-time highs reached this Summer, the Stock Market is already vulnerable to a sell-off. This issue could just accelerate the inevitable. The Market did rally the day after the impeachment inquiry was announced. Some of the strength came after the President announced a trade deal with China might come soon, for like the 137th time. But another theory is that the American public at large does not support impeachment, to the tune of 65% polled, so the thinking could be this move just might assist in the President securing a second term. It’s tough to know what the Market thinks of the Trump Presidency, because it has been so incredibly volatile. The Stock Market likes political gridlock and pro-growth policies.
The takeaway is that each instance of impeachment was different and it’s probably safe to say this time is different too. But what’s clear is that over time, the Stock Market has ultimately reflected what’s been going on in the earnings and economic cycle. Washington has been generally a sideshow that catches Wall Street’s attention and is oftentimes a distraction from the fundamental facts. The sample size is small. But we would argue that no President is bigger than the engines of the American economy.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
