Since equity markets seem to want to worry about everything (all at once) just now, today we will update our work on what presidential impeachment might do to US stocks. With Special Counsel Robert Mueller’s investigation back in the headlines, this is one market narrative with more lives than the proverbial feline. To be clear, we are as apolitical as a pile of rocks here at DataTrek. But since “political uncertainty” is a legitimate risk factor, we’ll go though the numbers today.
Four points to our discussion on this topic:
#1. The odds of the House impeaching President Trump over the remainder of his first term are now 42%, according to online prediction market www.predictit.org. That current reading compares to:
- An all time high of 48% on December 8th
- A recent low of 37% in late November
- 47% on Election Day 2018
- You can track this data here: https://www.predictit.org/markets/detail/3537/Will-Donald-Trump-be-impeached-in-his-first-term
Conclusion: online prediction markets are notoriously volatile and open to manipulation, but the last 90 days of readings and current odds seem reasonable. Given the recent flip of the House to the Democrats, impeachment is certainly on the table. Remember that House impeachment doesn’t mean Mr. Trump leaves the White House. That would require a two-thirds vote by the Senate, which seems unlikely since Republicans hold that chamber.
#2. There are only 2 useful comparison points if you want to assess the historical impact of presidential impeachment/resignation on US equity prices. The first is 1973 – 1974 (President Nixon). The second is 1998 – 1999 (President Clinton).
#3. Here is some relevant stock market return data from 1973 – 1974, the period of the Nixon impeachment proceedings and subsequent resignation:
- Total return on the S&P was -14.3% in 1973 and -25.9% in 1974.
- In the month leading up to President Nixon’s resignation on August 8th, the S&P 500 was largely unchanged at around 80-85 (yes, that’s where it was in 1974).
- In the month after Nixon left office, the S&P 500 fell by 13.8%. Stocks did rally in 1975 (+37.0%) and 1976 (+23.8%).
Conclusion: it is difficult to draw any inferences from this data because oil prices had spiked from $2.08/barrel (not a typo) in early 1973 to $10.00/barrel when President Nixon resigned. That move, caused by Middle East tensions, put the US in a deep inflation-driven recession. Political uncertainty certainly played some role in stock market volatility, but it was not the driving force behind the 1973/1974 bear market. And the 1975-1976 bull market was not a snapback rally as political uncertainty abated. Rather, it was the product of lower Fed Funds and renewed GDP growth.
#4. And this is the S&P 500 return data from 1998 – 1999, when President Clinton was impeached by the House but not removed from office by the Senate:
- US stocks were in the meat of the dot com bubble, with the S&P 500 +28.3% in 1998 and +20.9% in 1999.
- The S&P registered a 5.9% gain in December 1998, the month of the House vote to impeach, which passed.
- US stocks were up a further 4.1% in January 1999 as the Senate deliberated President Clinton’s fate. The S&P was down 2.2% on February 9th, the day of the actual vote, and showed a negative 3.2% for the month. The rest of the year, as noted, was solidly higher.
This example shows a similar lesson as the Nixon experience: markets do exhibit some modest volatility around political events, but it is the state of the economy, corporate earnings, and investor confidence that drives stock returns over anything longer than a few weeks.
We will end on the point you are likely pondering: isn’t this time different?President Trump is the key political driver of the current US/China trade war; perhaps a President Pence would handle things differently? Maybe. But it will come down to the state of the US economy to inform him – or any president – of what is possible or advisable. And that’s why the macro fundamentals will always matter more than who may – or may not be – president when it comes to US equity markets.