Impeachment may be just what market needs

With the impeachment inquiry likely to consume US President Donald Trump’s attention for as long as it lasts, one issue is less likely to hold his attention — his trade war with China. And for markets, putting the trade war on the back burner may be a more significant catalyst.

Indeed, Trump may find himself playing defence within his own party for the first time. Until now, he has largely been free to pursue his own economic agenda, even if it was at odds with Republican orthodoxy and the interests of loyal voters in red districts.

Previously, the only weapon Republican members of Congress had against Trump was public disagreement, for which they often paid a price. But now, congressional Republicans have some leverage over the president. If Democrats in the house ultimately vote to impeach Trump, it’s possible that 20 Republicans in the Senate could end his presidency. They may pay a price with their own voters if they did that, but it also gives them power they previously haven’t had.

Few issues matter more for markets than the trade war with China. Although the US economy continues to hold up reasonably well, the pockets that are suffering — manufacturing and farming — are mainly in Trump-friendly districts in the Midwest. Republican elected officials have largely defended the president even as they point out the pain it has caused in their districts.

Senate Republicans, should the impeachment process make its way to the upper house, might enjoy their new-found leverage. The president may need to reserve his political capital to shore up his support within his own party rather than pick fights over China. In fact, the president said this week that a trade deal with China could be reached sooner than expected.

As markets digest the reality of impeachment proceedings, they may welcome the shift. Although markets crashed under the weight of a significant recession during the impeachment inquiry into Richard Nixon, this was not the case during the Bill Clinton impeachment. Those events, which played out from October 1998 to February 1999, saw markets initially stumble, only to rally amid the booming economy of the late 1990s.

Impeachment may produce even more political gridlock than the 2018 midterm elections did. The proceedings will consume a tremendous amount of political and media oxygen and leave little time for an all-consuming trade war. Ultimately, markets are going to be driven more by the state of the economy than Washington’s unending political drama.

And as we head towards the end of the year, tailwinds for the economy remain. Rather than increase interest rates three or four times this year as the Federal Reserve anticipated in 2018, the Fed has cut twice and may cut rates again at either its October or December meeting. The housing market has improved after showing signs of contraction. Consumption and the labour market remain robust. Manufacturing is sluggish in the US and even weaker abroad. But that sector is cyclical and has been in a slump for a while, leaving open the chance that it could rebound at some point soon.

If impeachment proceedings lead to a halt in Trump’s dispute with China while global trade and manufacturing recover, we may have ended up getting the catalyst needed for faster economic growth and a rally in markets.

Congressional Republicans have some leverage over the president