“Would Trump’s impeachment crash the market?”

A longtime reader asked me this last week.

The email came after House Speaker Nancy Pelosi announced a formal impeachment inquiry into President Trump’s dealings with Ukraine.

We could argue until we’re blue in the face about the merits of the inquiry. But that doesn’t really matter for us as investors. What matters is how this all affects the stock market.

A lot of people have a vague sense that impeaching Trump is bad for stocks. Political chaos means stocks go down, right?

Well, no—not necessarily. If history is any guide, fundamentals and not politics drive the stock market.

Stocks Don’t Care About Theater

Kicking Trump to the curb is a two-step process.

First, the House would have to impeach him. This takes a simple majority vote. There’s a good chance this will happen, since the Democrats control the House.

Then it would take a two-thirds majority vote in the Senate to convict him and remove him from office. That’s not likely to happen, since the Republicans control the Senate. Prediction firm PredictIt puts the odds of President Trump being removed from office at 20%.

This all makes for riveting political theater. But it has little to no effect on the stock market. And we’ve already seen hints of that.

Pelosi announced the impeachment inquiry on September 24. Since then, the S&P 500 has stayed flat:

Stocks Didn’t Care About the Blue Dress

Think back to the Clinton era…

The House opened a formal impeachment inquiry into President Clinton in October 1998. It voted to impeach him that December. Then the Senate acquitted him in February 1999.

People were scandalized. But stocks could not have cared less. The S&P 500 shot up 27% as the whole debacle played out:

That’s nothing to sneeze at. The S&P 500 has risen about that much since February 2017. But the impeachment circus didn’t drive the big Clinton-era gains, as I’ll show you in a moment.

Nixon—The Impeachment that Never Was

During Nixon’s near impeachment, stocks did the opposite of what they would later do during the Clinton days.

The Saturday Night Massacre jumpstarted the Nixon impeachment process in October 1973. The House began its formal inquiry the following February, and impeachment proceedings started that May.

Nixon resigned in August 1974, shortly before the House could vote on impeachment.

The S&P 500 fell 33% during this period:

That’s a steep drop. But there were other factors driving the market, just as there were during Clinton’s impeachment.

This Is What Drives Stocks

Let’s take a side-by-side look at the economic fundamentals during the Nixon and Clinton impeachment proceedings and see how they compare to our current situation.

During Clinton’s impeachment, the tech bubble was driving stocks higher. The Federal Reserve was also lowering interest rates, which tends to boost stock prices (as we’ve discussed before). Meanwhile, unemployment and inflation were near lows for the decade. And the economy had expanded for eight straight years.

The situation was a lot different under Nixon, to say the least. The US economy was in a recession. Inflation was in the double digits, and unemployment was rapidly rising.

Let’s put this in perspective. At 11%, inflation was over five times the current rate. And unemployment was double the current rate.

Interest rates were also surging. By the time Nixon resigned, the 10-year Treasury note had hit 7.4%. (It’s currently at 1.7%.)

To add insult to injury, the US was in the middle of the Arab oil embargo.

Given the huge disparities, it’s not hard to see that market fundamentals drove stocks up during Clinton’s impeachment… and down during Nixon’s impeachment proceedings.

It’s Looking a Lot Like the Clinton Days

This all begs the question: What do the fundamentals look like now?

We’re much closer to the Clinton era than the Nixon era. Here are the stats again:

The Federal Reserve is lowering interest rates, which again, is good for stocks. Unemployment and inflation are near multi-decade lows. And the economy has expanded for 10 straight years.

Plus, high-flying technology stocks are driving the S&P 500 higher, just as they were during the Clinton era.

This isn’t to say that a Trump impeachment wouldn’t have indirect effects.

To start, it would weaken Trump’s negotiating position with China, pushing the likelihood of a US-China trade deal lower. This, in turn, could push stocks lower.

Impeachment would also hinder the chance of bipartisan legislation, such as economically stimulative infrastructure packages.

But the point remains: The push toward impeachment will have little to no direct effect on the stock market.

Anyone who says otherwise should not be taken seriously.

 

Robert Ross