December 13, 2019

Does Impeachment Matter to Markets?

By Michael McKeown, CFA, CPA - Chief Investment Officer

Does Impeachment Matter to Markets?

Over the last few decades, investors translated political headlines into market forecasts.  This was rarely a profitable knee-jerk reaction. Does it make sense to do the same with impeachment?

Most political strategists believe that the House will impeach President Trump and the Senate will not.

We thought it would be interesting to look back at how the market performed prior to and after past impeachment inquiries to see if any pattern emerged.  Since there were only two prior instances in the last 50 years, the sample size is admittedly small.

The impeachment inquiry for President Nixon began on February 6, 1974. The date of October 8, 1998 was the beginning of the inquiry of President Clinton.  In each case, the market  fell 20% in the three months prior to the inquiry. However, the stock market drifted higher until September 24th of 2019, which was three months prior to the inquiry into President Trump.

In 1974, the stock market declined 50% from the peak to trough.  A year after the inquiry began, it was down 16%.  This was in the midst of war in the Mideast, oil prices quadrupling, and the annual inflation rate hitting 12%. 

In the late summer of 1998, the stock market fell during the Asian currency crisis and failure of the gigantic hedge fund, Long-Term Capital Management.  It took a bailout of the fund by both Wall Street and the Fed to stabilize markets in the fall of that year.  Stocks would go on to rally nearly 40% over the next twelve months as the Tech Bubble reached its apex.

The market continues to drift higher in 2019 as the recession worries abated and the Fed lowered interest rates in the back half of the year.  The labor market continues to improve while corporate profits have been steady.  Surveys show that consumers and businesses are concerned about a slowdown in the economy, which already occurred outside of the U.S.

The fundamentals of the economy, corporations, and the consumer play a more important role in how the market moves than politics. With the two prior instances of impeachment resulting in wildly different market results, it is tough to draw a conclusion on the direction for today’s market.  Our key takeaway is that mixing politics and market forecasts is a tough way to make money.

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