Last week, I had three conversations with financial advisors asking if I thought that impeachment would mark the end of the Bull Market.
My answer was unequivocal and I will share it with you in a moment.
First, we have to understand that unlike larger samples to help us attempt to decipher the impact of factors like inflation, interest rates, wars, and even inverted yield curves on the U.S. stock market, we only have three impeachments in the history of the market. I really do not know much about the effect on the market of President Andrew Johnson's impeachment in 1868 and even if I did, I wonder how significant that would be today.
What I can tell you is that, according to MarketWatch, from the beginning of the Watergate break-in on June 17, 1972 until Nixon’s resignation on August 8, 1974, the S&P 500 tumbled -23.7%. (1)
In addition, I can tell you that at one point during President Clinton’s entanglement in the Starr report and impeachment, the market experienced a -19.4% drop, according to data from CFRA Research. (2)
However, before you think you see a pattern, one other date point you should be aware of is that from when the House voted to start President Clinton’s impeachment proceedings on October 8, 1998 to the Senate's acquittal on February 12, 1999, the S&P provided a rather healthy 28% gain. (2)
Therefore, does this mean that an impeachment will be the end of the bull market or that it does not matter? Let us look at other factors that were at play while the market was moving down or up during the previous two impeachments.
When examining President Nixon, you have to consider the state of the economy at that time. In my view, JPMorgan’s John Normand summarizes it best in an August 2018 note to clients: (3)
"In the six months before Nixon resigned, The S&P 500 declined about 20%, US 10-year rates rose about 120 basis points, the trade weighted dollar fell about 2.5% and gold rose about 15%.
These were extraordinary times, however, with or without domestic politics. The Bretton Woods system of fixed exchange rates was in the process of disintegrating due to US balance of payments stress and Nixon’s decision to suspend the dollar’s convertibility into gold — and devalue the currency — in 1971. Hence the dollar’s erratic swings and gold’s rally during this period. The First Oil Shock in late 1973 delivered both recession and rising inflation in 1974, and thus a stagflation-driven sell-off in Equities and Bonds."
Would this imply that a recession bound economy that was in an unmitigated mess could have been a heavier and more prominent factor than the impeachment?
When the market declined by almost 20% in 1998 during the events that lead to the October 1998 House Judiciary Committee vote to launch a congressional impeachment inquiry against President Clinton, the economic news was not good. The markets were dealing with Asian Crisis, the Russian default, and the collapse of Long Term Capital, all rocking the foundation of our financial system.
However, once the House voted to start President Clinton’s impeachment proceeding, the market rose as the strong economy and the dot.com craze failed to wake the bears.
That is the reason when asked if I think an impeachment would chase the bulls, my answer is simple.
In my view, pay more attention to the underlining markets and their strength or weakness, as this may be a far more predictive indicator to the future price of the S&P than an impeachment.
(1) Market Watch article link
(2) The Street.com
(3) Financial Times
https://ftalphaville.ft.com/2018/08/23/1535031802000/Constitutional-crisis-and-financial-markets/Subscribe to the Dunham Blog