Ten percent? Thirty percent? Seventy percent? You can argue about how real the threat of Donald Trump being impeached has become. But there is one thing you can't dispute: the markets are far too relaxed about the risk.
Most investors seem about as bothered by the chances of life being discovered on Mars as they are about Trump's impeachment. True, the enthusiasm that accompanied his election has long faded. On taking office, investors hoped that a mix of major corporate tax cuts and a splurge of infrastructure spending would give the economy a powerful boost. No one is really talking about that any more. It seems unlikely that the president will ever have the political goodwill to get anything like that through Congress. The stimulus can be safely forgotten about.
Yet that has not made any difference to the market. The Nasdaq has been hitting record highs powered largely by the tech giants, such as Amazon, Netflix and Alphabet and so have the other major indices. A couple of trillion euros of freshly printed money from the European Central Bank, and the crushing of populism in recent elections, has driven European stocks to fresh highs. Trump might be in big political trouble, but no one thinks that is an economic story. But hold on. We have some fairly recent history to tell us that is not necessarily right.
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Bill Clinton faced the threat of impeachment during his second term in office, but it never came close to happening. The last serious scandal of a similar magnitude was Watergate, during Richard Nixon's second term in office. In the end, Nixon resigned, but the hearings came close to full-scale legal action to remove him from office, and the political system was wracked by the crisis for more than a year. And what happened to the markets in that time?
Between the date of the Watergate break in and Nixon's resignation, the S&P 500 dropped by an alarming 23%. Interestingly, the data shows that during the first six months of the saga, investors became more bullish, as they dismissed the story as Washington tittle-tattle. It was only close to the end that they turned very bearish and when they did, equities went into full-scale retreat.
That script is likely to be repeated four decades later. In the first few months, the markets will be complacent for a long time. That is the phase we are in right now. Then they will panic when they realise that the world's largest economy has descended into political chaos, and that its leader may face several months fighting serious charges before being humiliatingly removed from the presidency. And that will be made a lot worse by the unpredictable responses from a wounded Trump. At the very least, the American government will be completely paralysed for the best part of the year. At worst, he might do something very stupid and very damaging for the global economy.
Impeachment will not be an easy process. It will last for months and months, and involves intense legal wrangling. Will investors feel confident in American equities, in the dollar, or in the Federal Reserve, while all that is going on? It seems unlikely. If and when Trump's vice president Mike Pence is installed as president, possibly with Jeb Bush alongside him as vice president, sentiment will recover. A far more traditional pair of conservative Republicans will have taken power, with a far more coherent pro-business agenda. But it is going to be a rocky ride until then. The impeachment trade has only just started.
