How do presidential impeachments affect markets?
How do presidential impeachments affect markets?
US President Donald Trump has this week faced the fresh prospect of impeachment. It therefore seems timely to revisit research we undertook in 2017. We examined the history of markets and how they reacted when previous president had faced such proceedings.
Here, we highlight some of what we found but also offer some context of how the situation in Washington has changed between then and now.
What is an impeachment?
Under the US constitution, a president can be impeached for “treason, bribery or other high crimes and misdemeanours”. The impeachment procedure can ultimately lead to the removal of a sitting president from office.
The incidence of impeachment in the US are relatively rare, with only three attempts to impeach a sitting president since the founding of the country (Andrew Johnson, Richard Nixon and Bill Clinton).
Andrew Johnson, who served as president between 1865 and 1869, was impeached by the House of Representatives for “high crimes and misdemeanours”. These related to failing to provide sufficient protection to former slaves after the US Civil War. He was acquitted by the US Senate.
Richard Nixon, who was president from 1969 to 1974, resigned from office in the face of almost certain impeachment following the Watergate scandal. Bill Clinton, who served as president from 1993 to 2001, was impeached by the House of Representatives over allegations that he committed perjury and obstructed justice to conceal an affair with White House intern Monica Lewinsky. He was acquitted by the Senate.
Do markets react when presidents are impeached?
At first glance there appears to be no obvious pattern.
We found weak, rather than compelling, evidence that impeachment leads to higher volatility, although the evidence is stronger in periods where quantitative easing was not active.
Presidential impeachments are also associated variously with weaker, stronger and indifferent asset market performance. However, less superficially, we can link the impact on market performance to expectations of policy change resulting from an impeachment.
Where the perception is that a government’s policies are damaging the economy, the possibility of a change in government boosts asset performance. However, where a government is seen as benefitting the economy, or at least doing no harm, the prospect of an end to that policy set can induce market jitters.
We might read market reaction to events around President Clinton as an example of this, particularly given the rally following his acquittal. Of course, this can be as much due to the removal of uncertainty as a seal of approval on government policy.
Case study: The impeachment of President Clinton
The news of President Clinton’s involvement with Monica Lewinsky broke on 17 January 1998. Lewinsky eventually agreed to testify in late July of that year, and on 17 August Clinton admitted to an “inappropriate” relationship. A Republican-dominated Congress voted to begin impeachment proceedings in December for perjury and obstruction of justice. The trial began in January 1999 and concluded with Clinton’s acquittal in February of that year.
Chart: US asset performance during the Lewinsky Scandal
From analysing the chart above, it is difficult to note much impact of the scandal in the first half of 1998. Although there is increased volatility following Clinton’s confession, it should be noted that this coincided with the Russian debt crisis and subsequent failure of Long Term Capital Management in the US. The US market then outperformed following his acquittal. Bonds, meanwhile, rally on the confession and then sell off on the acquittal.
It is tempting to suggest this post-acquittal performance reflects assumptions of fiscal stimulus under a Democratic president. However, this does not tally with the budget surpluses achieved 1998-2001, or the Balanced Budget Act passed in 1997. An alternative reading is that, with uncertainty over the presidency removed, investment could return and growth expectations rise, prompting rising equities and higher bond yields. Again though, we would be remiss to omit events elsewhere: the tech bubble was inflating rapidly at this point, and is likely muddying the waters.
What does this mean for investors?
The US stock market fell in the days following the announcement of an impeachment inquiry by speaker Nancy Pelosi. How much of this related directly to the news is uncertain.
Two years ago we suggested that investors concerned about the US situation or similar political events around the world could consider two key questions. First, what is the likely direction of policy if the impeachment attempt is successful? And second, how likely is it that the impeachment attempt will be successful?
However, it is worth observing differences between then and now. Back then, President Trump was planning tax cuts and promising the imposition of trade tariffs. Impeachment may have distracted him and potentially stifled those aims, this may have had a knock-on effect on markets. Two years on, he’s pushed through those aims: taxes have been cut and trade tariffs have been imposed. Given the bipartisan consensus on the threat China poses to the US, tariffs against China are likely here to stay. On this basis alone, impeachment proceedings may have less sway on markets. One potential market positive could centre on global markets ex-China, with a reduced risk of US tariffs for other markets under a new president.
For more detailed analysis of the relationship between impeachments and markets, please read the full paper here.
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