Key Takeaways

  • The House of Representatives has opened a formal impeachment inquiry into President Trump
  • Equity markets fell in reaction, but quickly rebounded on positive trade news
  • Historically, equity markets have not been greatly affected by impeachment-related events
  • While short-term volatility is expected, we believe the stock market will continue its current slow, upward trend and the economy will continue along its current trend of slow but positive growth

On Tuesday, September 24, 2019, Speaker Nancy Pelosi announced that the House of Representatives would launch a formal impeachment inquiry into allegations that President Trump solicited foreign interference in the 2020 Presidential Election. The president is alleged to have withheld aid to Ukraine in an effort to pressure that country to open an investigation into the business dealings of former Vice President Joe Biden's son. The inquiry is a prelude to a possible impeachment of President Trump by the House of Representatives.

In response, markets were down Tuesday; major U.S. equity indexes declined 0.5 to 1.5% and bond yields fell. However, stocks staged a comeback on Wednesday, as increased optimism about a U.S.-China trade deal overshadowed the political turmoil in Washington. For the remainder of the week global equity markets were relatively calm, with investors focused more on U.S.-China trade developments than impeachment headlines.

To fully understand the potential impact of an impeachment inquiry on markets, it's important to understand the nuances of the impeachment process and the historical performance of equity markets amid past impeachment investigations.

How the Impeachment Process Unfolds

Currently, six separate House committees are investigating the president as part of the impeachment inquiry. Their conclusions will be sent to the House Judiciary Committee, which will determine whether there is cause to introduce formal articles of impeachment to be voted on by the full House.

If a majority of House members vote to impeach the president, the articles of impeachment will move on to the Republican-controlled Senate, which would then hold a trial, overseen by the Chief Justice of the Supreme Court. Following the trial, the Senate would vote on whether to convict the president (and thus, remove him from office) or acquit him of the charges.

While impeachment requires only a simple majority vote in the House, conviction and removal from office requires a two-thirds supermajority vote in the Senate — 67 votes. The Senate currently has 53 Republicans, 45 Democrats and two independent members who caucus with the Democrats.

Two U.S. presidents have been impeached: Andrew Johnson in 1868 and Bill Clinton in 1998. Both were acquitted. An impeachment inquiry into President Richard Nixon led to his resignation in 1974, though he was never formally impeached.

How Markets Have Reacted Historically

Generally speaking, aside from some short-term volatility resulting from new developments in the news cycle, equity markets have taken impeachment-related investigations in stride, hewing closely to existing trends.

Exhibit 1: The S&P 500 in Previous Impeachment Cases

In the year preceding President Nixon's resignation, skyrocketing oil prices (caused by the OPEC oil embargo) and interest rate hikes (intended to fight inflation) tipped the U.S. economy into a recession. In the case of President Clinton, the surging technology sector of the late 1990s kept the economy on the rise. In both cases, evidence seems to say that markets are more likely to be driven by the underlying fundamentals of the economy rather than the particulars of the political situation.

Looking at the current 200- and 100-day moving averages of the S&P 500 index, markets have lately been flat to moderately positive. Given our long-term expectations for slower, but positive, economic growth, moderate inflation, and low interest rates, we expect that trend will continue despite what's going on in Washington.

Expect Volatility, Stick to Your Plan

In the short-term, we do expect the uncertainty in Washington to cause bouts of market volatility. Bipartisan legislative efforts, such as infrastructure spending, immigration reform or the passing of the USMA trade bill, seem unlikely to proceed amid the impeachment inquiry. On the positive side, however, the recent extension of the debt ceiling postponed the next two years of automatic spending cuts, which allows federal spending to stay on an expansionary path through mid-2021.

Additionally, uncertainty around trade between the U.S. and China and the impending 2020 U.S. presidential election will continue to influence markets in the months to come. How the impeachment proceedings will affect these matters is yet to be seen.

We continue to believe that equities are behaving just as we would expect during the mature stage of an economic cycle, and are not surprised that markets seem to be shrugging off the latest news and focusing on the substantive issues that have a real impact on the economy, such as trade and consumer confidence. Investors should follow suit and not get too caught up in the headlines, but rather remain disciplined in the face of uncertainty by sticking to their long-term investment plan.

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