Go to nearly any news website, TV, or radio station and you will most likely be bombarded with updates regarding the impeachment of President Donald Trump. We have already heard concerns from several of our clients that the drama surrounding this impeachment process will have adverse effects on their investment portfolios. While I do not want to dive into a political stance in this article, as tempting as that may be, I would like to try to provide some information and historical context to the situation and what effect that can have on your portfolio.
The Process of Impeachment
First, I would like to bring some clarity to the impeachment process and at which stage we are currently in. To start, the House Judiciary Committee formerly filed their articles of impeachment based on the current set of inquiry hearings. The Committee then will vote on whether or not these articles of impeachment will move forward, requiring 21 votes in favor (41 House members: 24 Democrat and 17 Republicans). The committee passed two articles of impeachment with this vote, abuse of power and obstruction of justice, as a result of the dealings with Ukraine.
These articles then went to the full floor of the House of Representatives and required a simple majority vote of the 235 Democrats and 199 Republicans to pass each individual article. Both articles received majority votes making Donald Trump officially the third U.S. President in history to be impeached.
It is very important to remember; impeachment does not mean Trump must leave office. For Trump to be removed from office there would have to be a two-thirds vote in the Senate to convict President Trump of the articles of impeachment. While it was easy to predict that Trump would be impeached by the House of Representatives, it seems far more unlikely that he will earn any convictions and be removed from office by the Senate which is made up of 53 Republicans and 45 Democrats. The Senate trial is set to begin any day now and can potentially last several weeks before the final vote.
History of Impeachment and the Stock Market
We have seen US Presidents be impeached before, two recent cases are Richard Nixon in 1973-74 and Bill Clinton in 1998-99. To figure out if all this hype surrounding the Trump impeachment is news or noise we will take a look at each case and see how the stock market reacted and more importantly why it reacted that way.
Impeachment hearings began against President Nixon in October of 1973 due to the Watergate scandal. However, in August of 1974 Nixon resigned from office prior to the House’s vote on three articles of impeachment for obstruction of justice, abuse of power, and contempt of Congress. While he was not technically impeached, his removal from office due to public and political scrutiny makes this a good case study for how markets may react when the President faces impeachment.
Between 10/30/1973 (impeachment hearings started) and 8/9/1974 (Nixon resigned) the S&P 500, which is a common measure of the stock market, was down 26%1. The S&P 500 continued to drop throughout the rest of 1974 and saw more than a 40% reduction from the peak in 1973 to the low in September 19741. This is obviously a major market decline and one big enough to scare the most risk tolerant of investors.
While the actions of the House and the President certainly created some volatility in the stock market that year, an even bigger factor behind the precipitous drop in stock prices had much more to do with the underlying economic factors. This was a period of what is now known as stagflation, meaning slowing economic growth and rising inflation. More simply, as layoffs were happening, we also had rising prices, so more people were out of work and goods were becoming more expensive at the same time, definitely not a recipe for success in a consumer driven economy.
Impeachment proceeding for President Bill Clinton started in October of 1998 on charges of lying under oath and obstruction of justice resulting from the sexual harassment lawsuit surrounding the Monica Lewinsky scandal. The process lasted until February of 1999 when Clinton was acquitted of all charges by the Senate. President Clinton was impeached in December 1998 and stayed in office until January 2001. The market was up and down over this time frame but more of it had to do with what was happening in the market and the economy than what was happening in the white house and the court room.
For the duration of Clinton’s impeachment proceedings, between 10/8/1998 to 2/12/1999, the S&P 500 was up over 26%1. Another 20%+ was gained over the course of 1999 up until March of 20001. A big factor in this market rise over this time were the ridiculous valuations and unsustainable production of the Dot Com Bubble and Telecom Crash.
In March of 2000 the NASDAQ (an index compiled of tech stocks) reached an all-time high of 5,046. Tech stocks were so overvalued, trading at prices of over 100x their company’s earnings on average. In comparison, right now the NASDAQ is trading around 33x their earnings2. Over the next two and a half years after hitting a high in 2000, tech stocks tumbled as many of these companies disappeared, the NASDAQ lost over 75% of its value1, and stock valuations came back into check.
What Does This Mean for My Portfolio?
Right now, we believe that President Trump will not be convicted by the Senate on any articles of impeachment and will therefor stay in office. This is important news for many reasons, but not when it comes to the long-term performance of the stock market. I do not doubt that public opinion and disarray in Washington D.C. can add to short-term market swings, but the performance of the stock market has more to do with the performance of the overall economy. To try to stay informed on the state of the stock market one should look to things like jobs reports, hiring freezes, layoffs, inflation, corporate earnings, and consumer confidence, not whatever headline is being plastered across the television. Despite being 10 years into a bull market, bull markets don’t die from old age. Right now, the economy is strong so it is important to maintain integrity in your asset allocation regardless of what is happening politically. It is more important to pay close attention to various economic reports and adjust accordingly when these variables significantly change. If this does not sound like something you want to do on a daily basis, come talk to one of our Wealth Managers at Virtus Wealth Management for some experienced, educated, and personal advice.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There can be no guarantee that strategies promoted will be successful and no guarantee of positive results.