Impeachment and the Financial Markets

Sam Ngooi Comments

The financial media continues to assign reasons for current stock and bond price movements, up and down, including: (a) the extent of economic slowdown in the US and internationally; (b) progress, or lack thereof, in the ongoing trade war with China and other countries; and (c) the Federal Reserve’s willingness, or reluctance, to continue lowering interest rates to stimulate economic activity without generating unwanted inflation.

Towards the end of September, a new factor entered the narrative, as the likelihood of impeaching President Trump seemed to be on the rise.  Whether that event would help or hurt financial asset prices became a question. There were up and down days during this period, which would seem to make causation quite difficult to assign. That said, and with the understanding there are many different views on this topic, we will discuss an article by Neil Irwin on this subject (NYT, 9/26/19, page B3).

The article begins by noting that during the two-year period starting with the 1972 Watergate break-in  and ending with President Nixon’s resignation in 1974, the S&P 500 fell 25%. During the Clinton impeachment in 1998, by contrast, the S&P 500 gained 22%. The article takes the position that “in the 1970s markets were not responding to troubles and high drama in Washington; they were adjusting to oil embargoes and a spike in inflation. In 1998, the markets reflected a booming economy…. These historical episodes of impeachment drama show that any moves driven by political headlines tend to be modest and short-lived. Economic fundamentals matter a lot more. So don’t be surprised by an occasional day in which activity in Washington appears to move markets…. But do be surprised if these effects turn out to be more than temporary blips.”

The article continues by citing a report from economists at Cornerstone Macro, concluding that:  “Although there were days when market moves were outsized, in both historical examples, markets simply continued a trend that was already in place and attributable to other factors…. So the existing market trend – reflecting a global economic slowdown particularly concentrated in manufacturing – is likely to persist, unaffected by the president’s latest troubles.”

Mr. Irwin adds a caveat: “The question for a potential Trump impeachment seems less about the instant reaction to the latest developments, and more about whether there could be a feedback  loop between impeachment and economic policy.” He cites the ups and downs of  trade policy as a major factor in today’s markets, “much as the oil embargo in 1973 and the dotcom boom in 1998, and that trade is an area over which President Trump has direct control.” He also notes that impeachment will likely make any legislative deal-making highly unlikely, and questions whether it is more or less likely to drive Trump to resolve some of the current trade conflicts. He concludes: “All of which means that to assess the eventual market implications of a Trump impeachment, it’s not really a matter of economic analysis.  It may ultimately be about behavioral analysis.”

In our view, impeachment is a “wild card,” adding uncertainty to an already uncertain political and financial environment. We tend to agree with the Irwin article’s basic point that impeachment may not be a major factor in how markets react over the long term, but also retain our general skepticism about predictions of any kind. Instead, as usual, we advocate developing asset allocations appropriate to your financial situation, and revising them only as your situation changes over time.