WASHINGTON (Sinclair Broadcast Group) — Everyone knows that the markets hate uncertainty but they're not so finicky when it comes to impeachment.
President Donald Trump has claimed on several occasions that "the markets would crash" and "everybody would be very poor" if Democrats moved ahead with impeachment. The latest warning came after a Sept. 24 stock market selloff that coincided with House Speaker Nancy Pelosi, D-Calif., declaring the formal start of an impeachment inquiry.
Contrary to warnings of doom and disaster, the Dow Jones Industrial Average and S&P 500 Index closed at record highs Wednesday, just a few hours after the House concluded its first public impeachment hearing. Investors appeared unfazed by the nearly six hours of testimony from the U.S. ambassador to Ukraine William Taylor and senior State Department official, George Kent. There was much more attention on China and a possible trade deal than Ukraine and a possible quid pro quo.
Amid a series of tweets slamming the impeachment process, Trump proclaimed, "Hit New Stock Market record again yesterday, the 20th time this year, with GREAT potential for the future."
All of the impeachment drama and political dysfunction in Washington appears to have been met with a collective shrug from Wall Street. The stock market has surged by nearly 20% this year and even with other factors—the trade wars, auto strike, the decline in global demand— U.S. GDP is still expected to hit a healthy 2.2% this year. On Thursday, the S&P edged up even further, hitting yet another high, while the other benchmark indexes slipped a fraction of a percent.
"The markets ignored Robert Mueller, and they're ignoring the impeachment hearings," wrote Greg Valliere, chief U.S. policy strategist at AGF Investments. "The markets correctly anticipate no more than three or four [Republican] Senators would vote to convict in a trial; at least 20 GOP defectors would be necessary to oust Donald Trump."
In many ways, the predictability of partisan politics has added some stability to a potentially volatile development. Chief income strategist at The Oxford Club, Marc Lichtenfeld noted, "While the impeachment might be significant from a historical perspective, from a market standpoint it's a non-event."
Still, there will be a lot of noise from Washington over the next few months, which is how long the impeachment proceedings with likely last, according to the best estimates of House and Senate leaders. Some Democratic members of Congress are anticipating a vote on the House floor by Christmas. After that, the Senate will deliberate for several weeks more. Senate Majority Leader Mitch McConnell, R-Ky., indicated that he would not rush the Senate trial. "I don’t think there’s any question that we have to take up the matter," McConnell told reporters Wednesday. "My own view is that we should give people an opportunity to put the case on."
CLINTON AND NIXON, BULLS AND BEARS
Historically, the markets have had a varied response to presidential impeachments. Research looking at market performance during past impeachment hearings show a mixed picture. According to recent analysis by LPL Financial Research, "impeachment inquiries can cause a good deal of volatility." At the same time, it's difficult to tease out the effects of the political process from larger trends and market-shifting events. In other words, correlation is not necessarily causation.
For example, stocks fell by 20% before the House launched its impeachment inquiry of President Bill Clinton in October 1998. That decline also coincided with the Russian financial crisis and the collapse of the massive, $126 billion-dollar hedge fund Long-Term Capital Management. On the opposite side, the stock market posted huge gains throughout the Clinton impeachment proceedings and Senate acquittal—a period that coincided with the tech-boom and U.S. federal budget surpluses. LPL Financial senior market strategist Ryan Detrick noted that the S&P 500 gained 41.6% six months after the Clinton impeachment, "suggesting markets might care more about the state of the economy than hearings out of Washington."
In the case of President Richard Nixon, his impeachment coincided with one of the worst bear markets in U.S. history. The Dow Jones lost nearly half of its value between January 1973 and December 1974, a period that encompassed the Watergate investigation, House impeachment investigation and Nixon's August 1974 resignation. On top of the political turmoil in Washington, there were a series of events that rocked the U.S. and world economy. The Bretton Woods fixed exchange rate system ended and Nixon decoupled the U.S. dollar from gold. The major oil-producing nations of OPEC halted exports to the United States causing gas shortages and price increases. Anti-inflation policies drove the U.S. economy into a recession that outlasted the Nixon administration.
In a 2017 study, Craig Botham an emerging markets economist with Schroders noted that in Nixon's case, there was a slight rally after the start of televised impeachment hearings and another bump in the months after Nixon resigned. Botham wrote that it is "reasonable to suggest that the resignation of President Nixon provided a catalyst." He added that "investors might have welcomed a change in economic policy, as well as an end to uncertainty."
The Schroders study looked at the three impeachment proceedings of Clinton, Nixon and Andrew Johnson and concluded, overall, that "there appears to be no obvious pattern" between market performance and presidential impeachments. There is some indication that impeachment may cause higher market volatility, but Botham described the evidence for that as "weak, rather than compelling." The study included data from the impeachment and removal of Brazil's president in 2016 and South Korea's president in 2017.
THE REAL RISKS BEYOND IMPEACHMENT
Just because impeachment is not likely to drive the economy into a wall, there are still other things to worry about: gridlock and the broader political dysfunction in Washington, trade wars and especially the ballooning federal deficit.
While much of the country was focused on the House impeachment hearing Wednesday, the Treasury Department released a report showing the U.S. budget deficit climbed to $134 billion last month, a 34% increase over the same time last year. Cumulatively, the deficit is expected to hit $984 billion this year and swell to over $1 trillion in 2020.
As Democrats and Republicans grilled Trump administration witnesses, Federal Reserve Chairman Jerome Powell's testimony on the other side of Capitol Hill went largely unnoticed. At that hearing, Powell warned lawmakers that "the federal budget is on an unsustainable path." The high and growing levels of debt could drag on economic growth and make it more difficult for the Federal Reserve to intervene if a recession occurs, he said. Moreover, the trade wars have eaten into revenues and three months of manufacturing sector losses are expected to take a toll on overall economic growth.
"The warning signs could not be any clearer," said Maya MacGuineas, the president of the bipartisan Committee for a Responsible Federal Budget. "Never before in the history of the country has the deficit been this bad when the economy was this strong." Calling the trend "unsustainable," MacGuineas warned, "This is a recipe to lose our economic strength and independence if we don't get our act together soon."
There are other issues on the horizon that will be much more consequential for the markets and the broader economy than impeachment. Many of those issues "may get lost in the fog" Valliere noted, advising, "Try to filter out the noise."
One of the most important short-term issues will be whether the United States and China can agree on "Phase One" of a trade deal that will remove some of the tariffs built up on both sides. There have been some optimistic signs, but Trump warned in a Tuesday trade policy speech that he would "substantially raise those tariffs" if Phase One falls through. To date, the Trump administration has put tariffs on the bulk of China's exports to the U.S.
Additionally, there are new reports that President Trump's White House Economic Council is cooking up another tax cut that could juice the economy heading into the 2020 election. And Fed Chairman Powell indicated this week that interest rates will hold steady through at least the end of the year.
Director of research at Wellington & Co., Todd Schoenberger argued that the impeachment hearings will have "zero effect" on the domestic economy, there could be global ramifications. "The Chinese could sit and wait for a conclusion, which would have an impact in coming quarters on our GDP rates," Schoenberger said. China may decide to let the trade war drag out until it's clear who is going to come out on top of the political "power struggle in Washington," he suggested.