Uncertainty, not impeachment, is the biggest fear for US markets
Political drama does not come much punchier than this. Former lieutenants of Donald Trump have been convicted or charged. His opponents hope the president will be next. Impeachment is the new hope for Democrats. A more traditional president might have tried to avoid being drawn into the fray. But Trump was not afraid to use the i-word himself. “If I ever got impeached, I think the market would crash, I think everybody would be very poor,” he told Fox News.
Certainly his impeachment would be a major political shock. No president has been both impeached and convicted in American history.
Bill Clinton came close in 1999 as did Andrew Johnson in 1868. Both were impeached by the House of Representatives and acquitted by the Senate. Richard Nixon resigned in 1974 before he could be impeached.
But what would it mean for markets and would everyone end up poorer?
Stocks performed well through most of the impeachment proceedings against Clinton. The S&P 500 index tumbled from July to September 1998 as the president was being investigated. But domestic politics were far from the only factor. The fallout from the East Asian crisis and the Russian default and devaluation hit stocks across the world. After the House voted and through to the Senate acquittal, markets kept on rising.
It was a different story for Nixon. His departure coincided with a market crash. The Dow Jones Industrial Average fell by 45pc from its peak in early 1973 to its trough in late 1974. It wiped out more than a decade of gains, taking prices to their lowest level since 1962. Stocks did not recover to beat the high of 1973 until 1982.
Trump may gain confidence from this. It was under Ronald Reagan, another tax-cutting president, that markets bounced back. On the other hand there were global factors at play too. Oil price shocks, stagflation and America’s struggles in Vietnam took place in the same era, so it would be unwise to attribute too much of the market’s behaviour to Nixon’s exit.
Trump cannot take all the credit for positive market performance during his presidency. Markets have risen sharply during his time in office but the economy had recovered under Barack Obama, with markets climbing steadily in his two terms of office.
Stocks have accelerated since then, however. The Republican’s tax cuts sent profits and stocks soaring, with markets at record highs. He has ramped up the budget deficit and pledged to raise infrastructure spending.
The risk is the economy will overheat. The Federal Reserve is raising interest rates, much to Trump’s annoyance, and higher rates have in the past led to market corrections. For now, growth is roaring ahead. The question is what might happen without Trump in the White House. He would be replaced by Mike Pence but economists and analysts are not worried by that.
“Pence’s record suggests fiscal policy would be similar or slightly more market-friendly,” says Paul Donovan, chief economist at UBS Global Wealth Management. “His trade policies would almost certainly be better economically and for markets. Markets as a rule also dislike uncertainty.” This is an irony of the situation. The greatest possible political upheaval could lead to less uncertainty. Getting to this stage could cause plenty of chaos, however.
Imagine how an often unpredictable president would behave in the months it could take for impeachment to conclude. It could be affecting economic policies now, says strategist Michael Every at Rabobank: “As long as this sword of Damocles is hanging over the White House there will be a need to look tough – in which case trade wars roll on.”
‘Pence’s trade policies would almost certainly be better for the markets’