Impeachment

What happens to the markets if President Trump is impeached? It isn’t my intention to give a prediction on if he will or will not be impeached. I am writing this to analyze what would happen if he is impeached, so that you will be prepared in the event. My philosophy is to prepare for the worst and hope for the best. You can decide for yourself what the best- and worse-case scenarios are. That is not the purpose of this eletter; this is about the markets, not the merits (or lack-thereof) of impeachment.

Prior to his election as Vice President, Andrew Johnson had been a Senator from Tennessee, and one of the few Southerners who had remained loyal to the Union during the Civil War. Six weeks after being sworn in as Vice President, Andrew Johnson was elevated to President when Abraham Lincoln was assassinated in 1865. Johnson took a moderate approach to the reconstruction of the South following the war. This did not sit well with radical Republicans, nor with Edwin McMasters Stanton, who had been serving as Secretary of War during and after the Civil War. Stanton was critical of Johnson, and in 1868, Johnson fired him. The House began impeachment proceedings three days later, on February 24, 1868 for “high crimes and misdemeanors,” and one week later, the House issued eleven articles of impeachment. Over the course of the next several months, impeachment votes failed repeatedly, falling just short of the two-thirds vote required for conviction.

While there was no DOW in 1868, scholars have tracked the market. In the 3 months prior to the commencement of impeachment proceedings the market was up a little over 10%. During the months of impeachment, the market swooned and dipped. In the two months following the end of the impeachment proceedings, the markets climbed back up and was 6% higher than before the proceedings had begun.

The second impeachment proceeding was that of Richard Nixon. During the 1972 election year there was a break-in at the Democratic National Headquarters in the Watergate Hotel complex. I remember reading the first article published by the Washington Post, written by Woodward and Bernstein, stating that the one of the burglars had an address book that listed E. Howard Hunt and possessed a check signed by Charles Colson. At the time, I did not understand the significance of those key elements. I was young and dumb. Nixon went on to be elected in a landslide. The investigation of the break-in continued, and began to narrow its focus onto John Dean. The Democratic Senate began its investigation in May 1973, and the Department of Justice appointed Archibald Cox as Special Prosecutor. In July 1973, Alexander Butterfield testified that President Nixon taped conversations in the White House. In October, as the heat was turning up, Nixon fired Cox. In November 1973, Nixon gave his famous “I am not a crook” speech. But it took until August 8, 1974 for Nixon to resign.

During 1972 and 1973, the stock market was in a very strong downtrend. OPEC had cut oil supplies and the United States was seeing a significant shortage as prices rose. The market would tumble. In the 694 days from January 11, 1973 through December 6, 1974, the Dow Jones lost 45% of its value, making it the 7^th worst bear market in the Dow Jones’ history. The economy had slowed from a gain of 7.2% in GDP to -2.1%. Inflation (CPI) jumped from 3.4% in 1972 to 12.3% in 1974. It was against that backdrop the investigation of Watergate took place. The Dow would climb roughly 70% from the Nixon’s resignation to the end of 1975.

The third impeachment was Bill Clinton’s in the 1990s. Ken Starr had been appointed to investigate the failed land deal Whitewater. The allegation was that Bill Clinton had pressured David Hale into providing a $300,000 loan to Susan McDougal, a Clinton partner in the Whitewater Development Corporation. The investigation ranged from fired White House travel agents to a sexual harassment lawsuit filed by Paula Jones. In the course of the investigation, Linda Tripp provided Starr with a taped conversation of Monica Lewinsky. A Grand Jury was called and Clinton infamously defended himself by debating his use and definition of the word “is.” Six years after the initial investigation began, the House of Representatives, on December 19, 1998, initiated impeachment proceedings against the President. After conviction, fifty senators would vote to remove Clinton from office, but it was once again short of the two-thirds majority required. Like Johnson in 1868, Clinton escaped removal from office.

During the Clinton Presidency, the Dow had advanced from 3241 at the time of his inauguration to 9078 before impeachment proceedings began. The DOW would dip about 5% during the impeachment process and then continued up to over 11,000.

In summary, we do not know whether there will be an impeachment or not. While I believe history does not repeat, I do believe it rhymes; there are lessons to be learned. The economy was strong during the Clinton years and during the Johnson years. In both cases the market was rising before impeachment, dipped during the impeachment, and then began to rise again. The economy struggled and the Dow dropped leading up to the Nixon resignation. But the market turned upward following his resignation.

There is no guarantee that if there should be an impeachment, the market will follow the historical pattern, but my best guess has to be that it will.

The stock markets have been in a secular bull since March 2009. The economy in 2017 has continued to be strong. Bull markets do not die from old age; just because we are the 9^th year of this bull does not mean it will end any time soon. Corrections and reversal will happen as they have in each of the previous secular bull markets. John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, die on euphemism.” We have not yet reached euphemism.