It’s been just under a year since I first wrote this. Since then, it has become my most read article. I appreciate all who have stopped by to learn from my research and welcome any comments below.
My intent was to be informative and non-biased regarding a topic many have strong beliefs over. To do this, I looked at how the economy and stock market reacted when the possibility of impeachment arose. Thankfully, I only needed to look into the four times this happened in our nation’s history.
I found it strange that so few articles had been written on the topic of Presidential impeachment. A year after putting together my findings, I’ve inclined to believe that the reason behind this is because few of us consider it a possibility. Sure, there’s always been fringe partisan actors that push the idea, but there was little mainstream consideration.
In the year since this was written, serious minded leaders on both sides of the political spectrum have expressed concern about our current President. I personally believe that a presumption of innocence should maintained. I also believe that it’s my duty to inform investors about any potential risk to their portfolio.
We all have ingrained political bias. When it comes to investing, we need to put facts before intuition. To quote a wise man, “Call on God, but row away from the rocks”.
Original Article - May 17th, 2017
How would the stock market react to President Trump’s impeachment? Politics is a passionate subject for many, but most would agree that their personal finances are far more important. It doesn't matter if you're liberal or conservative, we all feel the same pain when our investments lose value. No one can predict a market downturn, but we know uncertainty drives the market. Nothing would seem to cause more uncertainty than the possibility of removing a sitting President… but what would really happen to the markets?
It may seem farfetched, but there is a chance our President will be removed from office. If you’re a betting man, the current odds are that President Trump has an 83% chance of making it to the end of 2017. If you’re putting money down, chances are only 50/50 that the President will make it to the end of his first term. Gamblers may have their own take on the Presidency, but the same wisdom of crowds setting the odds drive the stock market.
The job of a financial advisor is to take emotion out of investing… and politics. If an advisor is going to protect investors from rash decisions, the best way to do so is to inform them of the possibilities. There is no way of knowing what will happen to our President, nor can we know with certainty how the market would react. What we can do is look at history to see what's happened in the past.
History of Presidential Impeachment
The impeachment of a president is, thankfully, a very rare event. To date, there has not been a single president removed from office as a result of impeachment proceedings. Four presidents have faced impeachment, though Congress only voted on twice to impeach. Only one President has left office because of the accusations that led to impeachment.
In 1842, a resolution was introduced to impeach our 10th President, John Tyler. This was after his veto of a bill angered lawmakers. The initiative to do so failed. Andrew Johnson was the next president to face impeachment. The House of Representatives impeached the 17th President of the United States after he was accused of violating the Tenure of Office Act days after firing his Secretary of War in 1868. He was later acquitted by the Senate.
In modern times, we have two Presidents that faced impeachment. William Clinton, our 42nd President, was impeached by the House of Representatives in 1998 for misleading a grand jury about his extramarital affair. He was charged with perjury and obstruction of justice. The Senate acquitted him of both charges.
Most investors are aware of Watergate and the subsequent cover up. Richard Nixon faced impeachment in 1974 for obstruction of justice, abuse of power, and contempt of Congress. He was also accused of falsification of records related to bombing Cambodia and failure to pay taxes (The famous “I’m not a crook” line came when he released his taxes. Because of this, all Presidents except Donald Trump have shown their taxes since then). Nixon resigned from office prior to the impeachment process taking place. His successor, Gerald Ford, pardoned him for his crimes.
Impeachment’s Risk to the Current Stock Market
How the stock market reacted to previous impeachment proceedings can provide some insight into how our investment portfolios might react. To begin with, we need to look at where our markets currently stand. The U.S. stock market is in the second longest bull run. We have also seen tremendous growth since the election. While this growth cannot be attributed directly to the incoming President, it can be linked to investor sentiment.
After President Trump was elected, the stock market rose a respectable 6%. Since President Trump’s inauguration, the market has continued to rise. His first 100 days in office saw a 5.5% increase for the stock market. That performance puts market growth behind only President Kennedy and President Bush. This growth is in spite of the fact that most of his 100 day promises remained unfulfilled. Some of the rise can be attributed to investors pricing in a massive tax cuts. This is on top of a fundamentally strong stock market.
In the last month, market performance has continued to rise, though performance has been flat since April 25th. In the week since the firing of FBI director James Comey, the market has trended slightly downward. Short term performance in no way reflects long-term market trends, but investors’ confidence in the President seems to be in decline.
It’s not just investors that are losing patience with the White House. Over 80% of financial advisors supported Trump during the election, yet only 43% of them thought the President’s first 100 days were a success. Again, this could be a short-term trend, but it appears that confidence is eroding. Further loss of in the belief the President can move his agenda forward poses the greatest risk to the stock market in the near future.
In December of 2016, it was estimated that the impact of the tax cuts President Trump promised to deliver would increase the value of the stock market between 7% and 12%. The market reacted accordingly, and we have already seen a corresponding rise in value. When a one page tax plan was finally unveiled in late April, the market barely responded. One would have expected a more detailed plan to drive the market growth further, but this also points to the possibility that there is no more growth to be had.
This President has been sidelined by an unusual amount problems that are of his own creation. By firing the FBI director this week, consensus is that the President has put his agenda at risk. If that is the case, tax reform may be dead. A correction of 10% or more is likely if the market feels that tax cuts and deregulation are no longer possible. This would simply put us right back to where the market started. Is there a danger that the impeachment of President Trump could cause additional harm to the stock market? History can provide some answers.
Historical Market Reaction to Impeachment
U.S. Impeachment in the 1800s
Without the benefit of foresight, we need to look at how the market reacted to previous impeachment attempts if we want to understand what could happen. The first impeachment attempt in the United States took place in 1842. This took place during the economic recovery following the Panic of 1837. President Tyler vetoed a protectionist tariff increase (which was a tax partially intended to increase revenue) that Congress passed.
What followed was politics as partisan as we have today. A House select committee, headed by John Quincy Adams, recommended impeachment. Adams, an abolitionist who disliked the fact that Tyler was a slave owner, attempted a constitutional amendment that would have removed the two-thirds vote requirement for overturning a veto in favor of a simple majority vote. The result was a failure of both the veto override and impeachment. Afterward, the stock market began what is referred to as the Antebellum Cycle, which was a bull run that lasted for the following decade.
The next attempted impeachment was against Andrew Johnson. He was the first President to have a successful impeachment vote returned against him. In an echo of modern-day news, he was accused of a violation of the Tenure of Office Act after firing his Secretary of War. Unlike President Trump, President Johnson faced an extremely hostile Congress when he ascended to the office after the assassination of Abraham Lincoln.
While the House voted to impeach the President, the Senate failed (by one vote) to remove him from office. In the month prior to the vote, the stock market had gained 10%. The trial caused a brief pause in growth, but there was a 6% gain in the months that followed.
U.S. Impeachment in the 1900s
There is far more economic data available for the recent impeachment proceedings during the last century. The markets are also far more developed on top of being globally integrated. This has changed the nature of the stock market, but provides us with information that can better inform us of what we could expect if a President were to be impeached.
William Clinton was only the second President to have been impeached by the House, though the Senate once again failed to vote for removal. President Clinton had admitted to having a sexual relationship with a White House intern in August of 1998. In September of that year, the investigation into the affair released their findings. The stock market was up 5% during the week that the report was released.
There was a short sell off when the report was first released. Afterwards, the markets continued to grow. In December of that year, the House voted to impeach the President. Months later, in February, he was acquitted.
Between the time the news broke and President Clinton’s acquittal, the S&P 500 had grown by 28%. There were many factors that led to the growth, but the market did experience a sharp decline during the controversy. While uncertainty may have contributed to the 22% decline from July until October of 1998, most of the poor performance is attributed to the collapse of the hedge fund Long-Term Capital Management and the Russian Ruble Crisis. In the end, the stock market’s performance under President Clinton turned out to be the best on record.
The impeachment of Richard Nixon is the only example of a President leaving office because of impeachment. The House Judiciary Committee began formal impeachment hearings in May of 1974, with the first article of impeachment being passed on July 27th. On August 8th, Nixon announced his resignation. His Vice President, Gerald Ford, succeeded him the following day. President Ford pardoned Nixon for his involvement in the Watergate scandal on September 8thof 1974.
While the scandal that eventually forced Nixon’s resignation took place during his first term, it wasn’t uncovered until early in his second term. Nixon had won his second term by one of the greatest landslide victories of all time. At the start of his second term, the stock market reached a high point that would not be seen again until 1993.
The Watergate scandal was exposed on June 18th of 1972. From the start of his second term until his resignation a year and a half later, the S&P 500 fell 39%. Between the time the Senate first approved the committee to investigate Watergate on February 7th, 1973 until his resignation, the S&P 500 fell 28%. Many attribute the decline to a lack of public confidence in the President, but there were more damaging forces pushing the market down at the time.
President Nixon’s economic policies were the main cause of the market's decline. In 1971, the President imposed a wage freeze, an import tariff, and ended the gold standard. This ‘Nixon Shock’ caused the collapse of the international Bretton Woods monetary standard, which slowly pushed the markets downward. In October of 1973, OPEC enacted an oil embargo against the United States. This was a result of the devalued dollar hurting oil prices and President Nixon’s request of $2.2 billion of aid for Israel during the Yom Kippur War. The markets declined 16% the following month.
Impact of Impeachment
Our union is 240 years old, and in that time, we have only attempted to remove four presidents from office. Of the forty-five leaders of the United States, only one left office because of impeachment. The accusations against the other three were primarily partisan in nature. It’s also debatable how serious the laws broken, if any, were in nature.
Nixon stands alone as the only President that there is little doubt over the crimes committed. His impeachment is also the only time where the stock markets fell both during and after proceedings. Some have drawn the conclusion that the loss of public confidence in President Nixon was in part to blame, but there is no way of proving a correlation.
Instead, what seems to have driven the markets was the fundamentals of the economy at the time. Both Nixon and Clinton saw market declines during the proceedings, but outside forces were to blame. For President Clinton, it was the Russian Ruble Crisis and the collapse of LTCM. On the other hand, President Nixon’s economic policies were to blame for the poor market performance.
That should be the biggest take away for investors. The impact of impeachment on your investments could be severe, but will most likely be short-term and negligible in the long run. There may be a period of decline as the markets react to uncertainty, but the market should be expected to resume its trajectory once the issue is settled. Keep in mind, we are in the second longest bull run in history, so eventually it has to end. What will impact the markets more than anything are the President's economic policies. Trump has not been in office long enough to enact meaningful polices at this point. As time goes on, we could see Trump, much like Nixon, create conditions where the market underperforms.
Impeachment could actually improve market performance if investors start to believe that Trump's policies could do more harm than good. Of course, if President Trump is removed, we would expect the Vice President to push forward with a similar Republican agenda. Backlash over an impeachment could propel the Democrats to victory during the midterms, which would force a more balanced approach to the needed health care and tax reform.
The chances of President Trump being impeached are slim. After the firing of FBI Director James Comey, more have been calling for the investigation into his campaign's ties with Russia. We may never know if there were any transgressions, and the President could very well be innocent of the accusations against him. As President Nixon discovered, the cover up can be worse than the crime.
Does this mean you should change your investment strategy based on a potential impeachment charge? The answer is absolutely not. Stock picking and market timing has been proven over and over to be nothing more than a waste of money. Your long-term goals should be the focus. A loss of 10% or more just based on the taxes being priced into the market is a real possibility. If the thought of this kind of loss worries you, the best thing to do is schedule some time to discuss your goals with your financial advisor before news gets worse.