“Markets typically like gridlock in D.C.”
–Joseph Song, U.S. economist at Bank of America Merrill Lynch
Headlines
On September 24, Speaker of the U.S. House of Representatives, Nancy Pelosi, officially called for an impeachment inquiry into President Trump. Although recent economic indicators have stoked fear of a weakening U.S. economy, it appears that investors aren’t worried the impeachment inquiry against President Donald Trump will tank markets. Political drama seldom alters economic fundamentals. But it can influence presidential behavior, which in turn can affect economic policy.
Some of us are old enough to remember that President Nixon’s troubles coincided with a nasty bear market. But was there a link between Nixon and the 1973-74 slide, which lopped nearly 50% off the S&P 500? Or did the economic fundamentals hobble the major averages? Though political uncertainty likely exacerbated the selloff, high inflation, high interest rates, and a deep recession took a big toll on stocks.
Contrast 1973-74 with the late-1998 impeachment of Bill Clinton. Twenty-five years later, stocks performed well amid much better economic fundamentals. While no two situations are exactly alike, economic conditions today are more reminiscent of the late 1990s than of Nixon’s second term.
Table 1: Then vs Now
| 1973-74 – Bear Market | 1998 – Bull Market | 2019 – ? |
| Inflation rose to double-digit levels, peaking at over 12% | Inflation low and slowing | Inflation is low |
| Interest rates were spiking higher; prime loan rate hit 12% | Interest rates steady | Interest rates are low |
| OPEC oil embargo roils economy; oil prices rise four-fold | Oil plentiful; prices stable | A glut of oil exists today, and prices are well below levels of recent years |
| The unemployment rate jumped; the economy fell into a steep recession | The economy expanding | The economy is expanding, and the unemployment rate isnear a 50-year low |
Source: St. Louis Federal Reserve, U.S. State Dept.
After reviewing market and economic trends in the Nixon and Clinton impeachment periods, economists at Cornerstone Macro found that whatever had preceded the political uproar simply continued. They concluded that today’s existing market trends — reflecting a global economic slowdown particularly concentrated in manufacturing — are likely to persist, unaffected by the impeachment inquiry. The ups and downs of the trade wars have been the major driver of economic and financial developments in 2019, much as the oil embargo was in 1973 and the dot-com boom was in 1998.
There really is no obvious pattern to how a presidential impeachment is the procuring cause of weaker, stronger, or indifferent market performances. Uncertainty in the markets has too many variables, even though gridlock is fine for most investors. All of which means that to assess the eventual market implications of a Trump impeachment, it’s not mainly a matter of economic analysis. It may ultimately be about how an impeachment will affect policies — especially economic policies that can have a much larger effect on the markets.
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