Here we go again. By this time next year, we will all have survived another presidential election. But a year in the political process can seem like an eternity with a myriad of twists and turns swaying the election outcome. One of the more looming issues on investors’ minds is how the stock market would react to an impeachment of President Trump.
As with many things in life, it’s helpful to look to the past for an educated guess about what the future might hold. In the history of our country, only two presidents have been impeached: Andrew Johnson in 1868 and Bill Clinton in 1998. Richard Nixon would have been counted as a third if he hadn’t resigned in 1974, thus putting an end to the impeachment process.
Since the modern-day stock market didn’t exist during Andrew Johnson’s time, we can only rely on recent history. So, how did the equity market perform during the impeachment proceedings of Nixon and Clinton? Very differently, it turns out.
According to an October 2019 Barron’s article, the S&P 500 dropped 13% during Nixon’s impeachment proceedings, but it rose 28% during Clinton’s. However, the economic situation during those years made the main difference, the Barron’s article cited, “leaving the impact of the impeachment itself almost negligible.”
It seems that both impeachment proceedings happened to coincide with other, more pressing issues that had a greater impact than the proceedings themselves. The stock market was already in a downtrend when the Nixon impeachment process began due to the first oil price shock which pushed the country into a recession. Inflation was running out of control, and the Bretton Woods international currency exchange system collapsed. The political angst surrounding Nixon, it turns out, was the least of the market’s worries at the time.
The Clinton impeachment proceedings, on the other hand, were carried out during the tech bubble of the late 1990s. For the raging bull market, the Clinton impeachment was little more than a side show. While the stock market did see a slide in the fall before the impeachment inquiry began, the main culprits for that downturn were the Russian debt crisis and Long-Term Capital Management, a hedge fund that almost caused the global financial system to collapse.
With a falling stock market during the Nixon impeachment/resignation, but a rising market during Clinton’s impeachment, it’s difficult to extrapolate from history what might happen if Trump is impeached. Certainly, that would elicit knee-jerk reactions, leading to increased market volatility. But the state of the U.S. economy, global growth, and Fed actions are more likely to have more meaningful, longer-lasting impacts.
Some market participants believe that a Trump impeachment would mirror Clinton’s: an impeachment by the House but an acquittal by the Senate and it will largely be a non-event. The big difference this time around is that Nixon’s resignation and Clinton’s impeachment came during their second term, whereas a Trump impeachment would come in his first term, potentially throwing the 2020 election a curve ball.
Recently, the market has been less worried about a Trump impeachment and more concerned about the prospects of Senator Elizabeth Warren winning the 2020 presidential election. She is seen as the least market-friendly candidate among the Democrat contenders. According to a September 2019 MarketWatch article, Greg Valliere, chief U.S. policy strategist at AGF Investments, argued that “it was an improved showing by (Elizabeth) Warren that would be more likely than impeachment to upset market participants.”
Since House Speaker Nancy Pelosi announced a formal impeachment inquiry of President Trump after the market close on September 24, 2019, the S&P 500 is up over 2% as of the end of October, seemingly shrugging off any apprehensions. U.S.-China trade negotiations, economic data, earnings, and a Fed rate cut have been more than enough in the past month to occupy investors’ minds. That’s not to say the markets will be immune to impeachment turbulence in the coming months. If the equity market rolls over into a downtrend, no matter the reasons, rest assured that FSA will take appropriate actions in the portfolios.
Mary Ann Drucker
Assistant Portfolio Manager
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