Investor Response to Impeachment: Whatever – December 23, 2019
On Wednesday evening, the House of Representatives voted to impeach President Trump. On Thursday, the Dow Jones Industrials1, the NASDAQ Composite2, and the S&P 500 Index2 all finished the day at a record high. Shares added to gains on Friday.
Whatever, yawn, so what – that’s how investor responded. We also see it in the University of Michigan’s survey of consumer sentiment. “Just 2% of all consumers” mentioned impeachment in the December survey, which was released on Friday.
Before I go any further, I don’t want to make light of what has happened. An attempt to remove a president from office is a serious undertaking. It will illicit various responses, and we are all entitled to our opinions.
My goal in this week’s piece isn’t meant to be political. Instead, it’s designed to view and explain what has happened through the very narrow lens of an objective investor, i.e., one who views markets only through an economic lens.
Why didn’t we see a selloff? Let’s start with the economic backdrop, as illustrated by Table 1.
Richard Nixon was never impeached. He resigned prior to a House vote. While his political troubles may have added to market turmoil, the economy was in a steep recession, and interest rates/inflation were rising sharply. Today, such a combination would be toxic for stocks.
Fast forward 25 years and Bill Clinton was impeached, but stocks rose. Why? The economic fundamentals were much better. Fast forward another 20 years and today’s economy is more closely aligned to the late 1990s than the mid-1970s, as Table 1 illustrates.
As we get set to enter 2020, recession fears prevalent in the summer have subsided, the Federal Reserve isn’t eyeing a rate hike, and Trump just concluded a ‘skinny’ trade deal with China (removing a degree of uncertainty that has plagued investors).
The recently renegotiated free trade agreement between the U.S., Mexico, and Canada easily passed the House on Thursday. It’s expected to clear the Senate early next year.
Other factors
A yes vote on impeachment came as no surprise. Any negatives that might influence investors were already discounted. Further, few expect the Senate to convict and remove the president from office, which could create uncertainty for investors.
That said, with the holidays and new year just around the corner, economic prospects are respectable. Bottom line—economic growth and low interest rates have been supportive of stocks.
With the holidays uppermost on our mind, let me take a moment to wish you a Merry Christmas, a Happy Hanukkah, and a joyous holiday season!
Created 2019-12-23 15:36:22