Here’s an interesting question that’s just been rolling around in the back of my mind for a few days, for some inexplicable reason: what happens to markets if a US president gets impeached?
It’s not easy to impeach a president, but Trump’s trying his best
US president Donald Trump is going a long way to proving that, often in life, it’s generally easiest to assume that what you see really is what you get.
For a surprising amount of time, people seemed to assume he had a grand plan. Tweeting erratically was just part of a clever (perhaps even diabolically cunning) misinformation strategy.
As it turns out, Trump just really likes Twitter.
Anyway. All of the things that everyone hoped to see – a deal to build more infrastructure, a big spending splurge, a massive tax cut, some sort of rejigging of healthcare – have not been done.
His campaign is also under investigation for having inappropriate contacts with the Russians. I have no desire or interest in getting into the weeds on this. But if nothing else, it must be a serious distraction for Trump.
He is also pretty unpopular. In fact, according to Newsweek, he’s shaping up to be the most unpopular president ever. His approval rating, measured by pollsters Gallup, currently sits at 37%, while his disapproval rating is at 58%.
In short, things don’t look good. And as a result, impeachment keeps coming up. Impeachment is how you get rid of a president outside of election time. And Americans are split evenly on the idea – 42% reckon he should be impeached, and 42% reckon he shouldn’t, according to a poll for USA Today.
It’s not easy to do. First, the House of Representatives has to vote by a majority to impeach the president. That’s the easy bit. Then it goes to the Senate. But in the Senate, a two-thirds vote is required to actually remove the president. And that’s never happened.
Indeed, only two presidents in history have been impeached, and neither of them were removed from office, according to the BBC. The most recent was Bill Clinton in 1998. Clinton was done for lying about his affair with Monica Lewinsky.
As the BBC points out, Clinton remained popular throughout this time – in December 1998, his approval rating as president was 72%. So you don’t have to be disliked by the population to be impeached.
In the end, Clinton kept his job. When the bill reached the Senate in 1999, it failed to get the two-thirds backing needed to push it through.
In the run-up to the release of the report that led to Clinton’s impeachment, the market did suffer from jitters. Between July and September 1998, the S&P 500 fell by nearly 20%, narrowly avoiding a bear market.
However, once the news was out, the market couldn’t care less. It was besotted with the tech bubble. It recovered the entire loss by the end of November. Then, as Barry Ritholtz points out on Bloomberg, the S&P 500 rose by more than 21% in 1999, and the Nasdaq nearly doubled.
It all burst and went horribly wrong in 2000, of course, but that didn’t really have much to do with Clinton – certainly not his romantic life, at least.
The other US president to be impeached was Andrew Johnson in 1868. Johnson became president in 1865. Again, the Senate didn’t muster the required votes to throw him out. I’m not sure what the market was doing at the time – although there was a big financial crash in London in 1866 – but I suspect it was equally uninterested.
So, based on a very short sample size, we can say that impeachment doesn’t have to spell bad news for markets.
A more pertinent example is probably Richard Nixon. He was never impeached as such – the process was started but he resigned before it could happen. But the circumstances are arguably much closer to what’s happening today in terms of the sort of scandal that’s being discussed.
So what happened with Nixon? On paper, it looks bad. At the height of the Watergate scandal, reports Time, the S&P 500 fell by 14% during the month of October 1973.
However – just as with Clinton – you have to remember the wider context here. The US market (and global markets for that matter) was in the grip of a massive bear market between early 1973 and summer 1974.
Nixon was just one of many awful things that happened in the 1970s (a bout of double-digit inflation might remind people that borderline deflation isn’t the absolute worst thing that can happen to an economy) so I’m not convinced that you can draw a lot of conclusions from the market slide.
The market may not care much if Trump goes
So what are the chances of impeachment? As Ritholtz noted on Bloomberg recently, “presidents, regardless of party, get too much credit for when things go right and too much blame when they go wrong”. But he also acknowledges in other columns that Trump has made rather a mess of things.
Meanwhile, David Rosenberg of Gluskin Sheff – who doesn’t strike me as a radical left-winger – reckons the Democrats will regain the House in next year’s mid-term elections, “and impeachment proceedings will commence”.
So there’s a strong chance of something highly unusual happening here. Yet the truth is that markets appear, by now, to have pretty much given up on Trump doing anything useful. Tax reform, big spending boosts, repatriation of overseas profits – what are the odds of any of it happening anymore?
Instead, whatever markets are being driven by, it’s not hope that Trump will pull a rabbit out of the hat anymore. In fact, it might simply be that if Trump keeps the government in a strange form of gridlock, then the Fed is likely to be more cautious about raising rates.
And if he does get impeached – well, the Fed would be wary of doing anything over-excitable then too. And he might be replaced by someone the markets like better.
So the short answer is, if Trump does gets impeached, any market reaction is more likely to come in the run-up, when there’s uncertainty about whether or not it’ll happen. Once it’s out in the open, there’s a good chance that while it will grab a lot of headlines, it will barely register with the markets.
By that point of course, markets may have woken up to a few other worries – but Trump may not be the biggest one.
I’m sure this story won’t go away. We’ll follow up on it as and when we need to. But for now I wouldn’t have it high on your big list of investing concerns.