Political Drama and Stocks – September 30, 2019
Political drama in the nation’s capital hit a fevered pitch last week, as House Speaker Pelosi announced a formal impeachment inquiry of President Trump. You know I don’t make a habit of staking out political positions in my weekly articles.
However, a look through the eyes of a dispassionate investor is not out of bounds.
Mostly, the reaction from investors last week suggested the political uproar in D.C. did not create tremors on Wall Street, which remains fixated on U.S.-China trade headlines.
For illustrative purposes only, let’s review how investors reacted during two prior instances when a U.S. president was threatened with impeachment: President Nixon, who resigned rather than face a likely trial in the Senate, and President Clinton, who was impeached by the House, but not removed from office by the Senate.
During Watergate, stocks stumbled badly, with the S&P 500 Index tumbling nearly 50% between January 1973 and October 1974, per the St. Louis Federal Reserve.
While political instability may have exacerbated the market’s decline, let’s not discount the fact the U.S. was grappling with a lengthy recession, soaring interest rates, high inflation, and an OPEC oil embargo that led to a four-fold increase in oil prices.
That’s a nasty combination for stocks.
Prior to Clinton’s impeachment in 1998, the S&P 500 Index lost nearly 20% during a six-week period that ended in late August—blame a Russian economic crisis. During the impeachment proceedings, stocks rallied in response to more favorable economic fundamentals.
While trade and global economic worries abound, fundamentals in the U.S. are reasonably sound today—see Table 1 for a comparison.
More recently, U.S. economic data have, on average, exceeded expectations, according to the Citi Surprise Index, which compares actual economic reports with analyst forecasts (LPL Research, 9/24/19). It’s a reassuring economic signal.
Investor’s corner
Shorter-term, any number of headlines may impact trading, either positively or negatively. Medium- and longer-term, stocks have historically reacted to the economic fundamentals.
Created 2019-09-30 14:10:03