Impeachment implications ahead of the 2020 election
The prospect of impeaching President Donald Trump in advance of the next election has generated passionate public debate and partisan rancor on Capitol Hill. The two most recent impeachment inquiries occurred after Presidents Nixon and Clinton had been reelected, making them lame ducks in office and ineligible for a third term. The hearings now underway, by contrast, are taking place in the context of a heated presidential election campaign. If an indictment is passed by the House, which now appears likely, the Senate trial could occur in early 2020.
Paradoxically, an impeachment may encourage the leadership in both political parties to hold votes on other legislation, if only to demonstrate that Congress is able to function amidst the resulting acrimony. Our colleagues in the UBS US Office of Public Policy believe a vote on the US-Mexico-Canada free trade agreement will occur before year end. To the extent it passes, President Trump will claim an important legislative victory and House Speaker Nancy Pelosi will be better positioned to reject criticism that her caucus has been focused solely on removing the president from office.
What do the implications of impeachment mean for markets?
Impeachment inquiries are rare events in US history so any analysis of their market impact must be accompanied by a disclaimer that an indictment of a sitting president is, by its very nature, an idiosyncratic event. While there is no shortage of inflammatory headlines warning investors that an impeachment trial will trigger market turmoil, history suggests that other factors play a more prominent role in investor behavior. We are inclined to believe that global markets are more concerned with trade disputes, geopolitical tension in the Middle East, and decelerating economic growth.
The impeachment of Andrew Johnson provides us with little guidance because the US equity and fixed income markets have evolved dramatically since the middle of the nineteenth century. The entire episode was blessedly brief. The House commenced its inquiry on 24 February and impeached the president on 2 March 1868. He was acquitted by the Senate of both charges by 26 May.
The impeachment inquiries undertaken by the House of Representatives in 1973-74 provide more precise market data. Equities plunged in value from January 1973 through early December 1974, with the S&P index down by 45% over a two year period. And while Congressional hearings may have played a part in the decline, they constituted noise surrounding more fundamental challenges, such as an Arab oil embargo, military conflicts in the Middle East, a spike in inflation, devaluation of the US dollar and the imposition of wage and price controls. It’s also worth noting that patient investors recouped their losses in subsequent years.
The impeachment and subsequent trial of President Clinton played out in similar fashion, with financial markets distracted by other developments. The Russian sovereign debt default, a devaluation of the ruble, and the abrupt failure of a prominent hedge fund competed with the Congressional impeachment inquiry for investor attention. However, in contrast to the inquiries surrounding Watergate, the economy remained strong and equity markets performed well.
Key takeaways for investors
There is insufficient evidence to conclude that impeachments alone dictate the performance of either equities or bonds. In the two previous instances where the House of Representatives commenced an impeachment inquiry, other factors played more decisive roles in driving market returns.
We believe investors are well-advised to avoid trading on news items related to the impeachment inquiry. Occasional market volatility is unavoidable but longer-term performance will be determined by strategic asset allocations in a diversified portfolio. US economic growth is decelerating as we enter the late stage of the normal business cycle. While it’s difficult to predict how long this stage will last, the Fed appears willing to adopt looser monetary policy to avoid an imminent recession. Positive returns are still possible, provided investors are willing to exhibit patience, commit capital for the long-term, and accept the inevitability of short-term volatility.