You might think launching a formal impeachment inquiry against the sitting president of the United States would have a negative impact on markets.
That’s a reasonable assumption.
However, after House Speaker Nancy Pelosi announced just such an inquiry into President Donald Trump following whistleblower allegations that he pressured Ukraine to meddle in the 2020 elections by looking into the Democratic frontrunner, Joe Biden, Wall Street’s initial reaction has been fairly muted.
Even though news broke of Pelosi’s looming announcement during the trading day, the S&P 500 lost just 0.8% on Tuesday, then rebounded the next day.
But is it reasonable to expect such tranquil financial markets as the probe progresses? Let’s take a measured look at what the impact of advancing impeachment talks means for markets.
How Impeachment History Affects the Stock Market
There are only three analogous situations investors hoping to learn from American history can look to: President Andrew Johnson’s impeachment in 1868, the impeachment inquiry that led to President Richard Nixon’s resignation in 1974, and the impeachment of President Bill Clinton in 1998. They offer mixed messages of what investors can expect today.
— The inquiry into Johnson began Feb. 24, 1868, and markets fell 0.3% by March 31 of that year. By the end of June, following Johnson’s acquittal in the Senate, markets were up only 1.5% from their late February levels, according to figures from Global Financial Data.
— The inquiry of Nixon was announced Oct. 30, 1973. Markets fell 1.6% that day, fell 11% in a month, dropped 15.6% in six months and slumped 33.4% in 12 months.
— The inquiry into Clinton was announced Oct. 8, 1998. Markets fell 1.2% that day, but then rebounded to an 18% gain in the next 30 days, rose 41.6% in six months and advanced 29% in the next 12 months.
Matt Lampert, director of research at the Socionomics Institute, draws some conclusions for investors.
“The president’s potential removal from office will have no bearing on the trend of the stock market,” Lampert says. “However, the trend of the stock market will have a substantial bearing on the prospects for the president’s removal from office.”
Lampert points to markets that stayed steady or rose during the Johnson and Clinton proceedings
Tricky Dick? Not so lucky.
“The stock market fell hard leading up to President Nixon’s near-impeachment in 1974, and he resigned within months of the low in what was then the biggest stock market decline since the Great Depression,” Lampert says.
How You Should Invest Now
Many experts agree that there is little immediate and material threat to markets, but should things escalate, stocks may be in trouble. Furthermore, an escalation of the impeachment possibility could lead to such uncertainty that it ripples throughout global markets and begins affecting major negotiations like the U.S.-China trade spat.
In that case, a flee to safe-haven assets wouldn’t be surprising.
“This does not mark a new sort of inquiry and there are, and have been, several committees investigating the president over recent years,” says David Page, head of macroeconomic research at AXA Investment Managers. “The impact on markets first and the economy further down the line will be related to the speed and persistence of this process. A House vote to impeach in the future would be a material step forward along this path.”
Yohay Elam, currency analyst at FXStreet says markets are set to shrug the inquiry off — unless Trump’s political crisis intensifies beyond what can currently be seen.
Elam thinks impeachment at the hands of the House is already likely. All the risk comes from the possibility of a Senate removal, which would require a two-thirds majority vote.
For that, “some 40% of Republican senators would need to vote against their president. For that to happen, Republicans would have to calculate that continuing to back Trump would cost them their jobs. And for that to happen, Trump’s approval rating would probably need to sink below 30%,” Elam says.
For Elam, investors must watch Trump’s approval rating like a hawk. Should it crash, he sees the uncertainty driving investors into safe-haven assets like gold and the Japanese yen. Thankfully, you don’t have to be some high net worth client with access to fancy bankers to invest in such assets. Retail investors can easily invest in gold through ETFs like SPDR Gold Trust (ticker: GLD) and iShares Gold Trust ( IAU), the two largest gold ETFs by asets under management.
While the yen is a bit more obscure, that too is possible with the beauty of ETFs. The most liquid yen ETF by far is Invesco CurrencyShares Japanese Yen Trust ( FXY).
Several other experts foresee a retreat into blue-chip and risk-off investments. “We are going to see a lot of volatility,” says Clayton Alexander, an investment adviser and founder of Teton Wealth Group. “I think we will see more investors take a conservative position, waiting to see what will happen.”
“Any significant shocks in the U.S. markets due to political uncertainty will ripple across the world,” says Lukman Otunuga, research analyst at ForexTime Limited. “Risk assets and global equities remain the firing line.”
“Should the impeachment process end up complicating U.S.-China trade talks, this will be negative for global sentiment as investors fret over slowing global growth,” Otunuga says. “Safe-haven assets like the Japanese yen and gold should shine through the market chaos.”
The economy and market sentiment of 2019 is quite different from that of 1998, and that, in turn, was a different ballgame from the economy Nixon oversaw in the 1970s. Then, the U.S. was rattled by rising inflation, price controls and a struggle to adjust after ditching the gold standard.
And it’s quite safe to say the economy of 1868 was even less analogous to today’s.
It’s true that there may be some chicken-or-egg causal quagmire that emerges if falling markets coincide with a worsening outlook for Trump. But most agree that while the uncertainty of the impeachment narrative is an out-and-out risk for markets, it will take some serious escalation of the current scenario to put the 10-year bull market in the crosshairs.
Still, if the Trump administration has taught investors one lesson it’s that anything is possible.
So while Trump’s actual impeachment by both houses of Congress looks unlikely, the cautious investor should wait patiently, watch carefully, and be ready to hedge by buying less risky assets should this impeachment threat truly have legs.
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