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Off With His Head: Considering The Impact Of An Impeachment On The Capital Markets

Austin Main

One thing we can all agree on is that the markets don’t typically respond well to uncertainty. Given the formal announcement of a presidential impeachment inquiry, and the vast amount of political uncertainty that accompanies the process, now is the time to explore relationships or correlations between presidential impeachments and market downturns by observing past events within the US.

Fortunately for us as a country, presidential impeachments have been few and far between.  Unfortunately for us as investors, there is not a whole lot we can glean from history when our sample size is in the single digits; identifying trends and correlations in data requires sufficiently large sample sets in order to increase the power of our observations. In fact, looking back over the history of the United States there have only been a total of two presidential impeachments: Andrew Johnson in 1868, for which we have no reliable market data (although I’m sure some exists somewhere), and Bill Clinton in 1998 which occurred smack dab in the middle of the dotcom boom. Nixon had an impeachment inquiry begin in 1974 but Congress ended their proceedings after his resignation later that year.

If we follow down the rabbit hole and explore the market impact for both Nixon’s and Clinton’s impeachment proceedings, we find that these events don’t really give us any useful predictive data. The market’s reaction to Nixon’s impeachment proceedings and subsequent resignation were significantly overshadowed by macro events at the time – namely the Arab oil crisis and rising inflation, both of which weighted heavily on the markets. Any losses that may have been attributable to the presidential uncertainty were lost in the mix given the recession that was already underway at the time. Interestingly enough, the market actually bottomed only a few months after Nixon’s resignation.

Conversely, Clinton’s impeachment in the fall of 1998 occurred during the latter years of the second longest economic expansion in US history (we are currently experiencing the longest). Again, the market impact of Clinton’s impeachment proceedings were mostly lost in the shuffle as macro events like the Asian currency crisis and collapse of  Long Term Capital Management dominated financial headlines at the time. Despite the negative macro events, the S&P 500 soared during Clinton’s impeachment returning almost 28% from October 1998 through February 1999.

Within this very limited sample set, we have two distinctly different market outcomes. The one commonality with both is the fact that impeachment proceedings didn’t overshadow the macro backdrop that was already ongoing at the time. If we can garner anything from examining these events it’s that impeachment proceedings in isolation most likely aren’t enough to change the trajectory of the financial markets. Therefore, altering a portfolio based on one single catalyst can lead to adverse outcomes for the investor.

While it’s not within our expertise to weigh-in on the potential political ripple effects a presidential impeachment proceeding may impose, one thing we can say with certainty is that a well-diversified portfolio is structurally designed to withstand a variety of market conditions and economic shocks regardless of how mad the world gets.