On Friday, the House Judiciary Committee voted to advance two articles of impeachment against President Donald Trump to a vote by the full House of Representatives — marking just the fourth time in U.S. history that the full House has been set to consider impeaching a president.
How did the markets react? They were really watching news about the trade deal with China, but the major indexes ended the day higher: the Dow Jones industrial average was up nearly 221 to 28,132; the S&P 500 rose close to 27 at about 3,169; and the Nasdaq gained 63 to hit 8,717. Meanwhile, the fear-gauge CBOE Volatility Index (VIX) dropped 7% to end the day at 13.94.
This current “political shock” or “frenzy” driving headlines in Washington raises the question of whether we should care, points out Commonwealth Financial Network Chief Investment Officer Brad McMillan. “As citizens, we certainly should,” he said in a report on Friday. “As investors — no.”
Late this weekend, the House Judiciary Committee released a 658-page report describing the two articles of impeachment against the president. If the House votes to impeach, the trial will take place in the Senate, where Trump is widely expected to be acquitted.
Why Not Care?
Though the impeachment process has been chugging along for months, it “hasn’t derailed the economy or markets, both of which have shown continued slow growth,” McMillan explained. “From an economic standpoint, impeachment simply hasn’t mattered — and it isn’t likely to.”
Investors, of course, focus on the fundamentals like economic growth, earnings and labor costs, “and none of these factors has been affected by impeachment,” he added. “Looking at the risk this way, I think it makes sense that the markets have not been derailed by the impeachment process.”
What Does History Show?
Earlier impeachments rattled the markets over limited time frames, according to McMillan.
“But even so, the markets ultimately responded to the underlying economic facts. When, for example, the House Committee on the Judiciary approved articles of impeachment against President Nixon, the news knocked the markets down,” he explained.
At the time, of course, the country was experiencing a terrible economic situation, so poor market performance “would likely have happened regardless,” McMillan said.
President Bill Clinton’s impeachment trial did rattle the markets, “but they recovered and moved higher in response to strong economic fundamentals,” he said.
History, thus, tells us that while “we might well see some volatility from the pending impeachment … over time — and not that long a time — the markets are likely to stay in line with the fundamentals, which remain positive overall,” the CIO said.
(Only two U.S. presidents have been formally impeached by Congress — Andrew Johnson in 1868 and Bill Clinton in 1998; no president has been been removed from office through impeachment. Richard Nixon, in 1973, was the only other president besides Trump to face a formal impeachment inquiry in the House.)
How About Confidence?
If the current impeachment process does hurt the U.S. economy and markets, it probably will be tied to one area: confidence, he points out.
“If political dysfunction — and this risk isn’t limited to impeachment — shakes confidence, it could take a toll on the bigger economic picture. A long, drawn-out trial in the Senate could rattle individual consumers or business investors, causing harm to the economy,” according to McMillan.
“The more confrontational a trial becomes, the greater the potential for damage,” he wrote.
Any Likelihood of Damage?
According to McMillian, the U.S. Senate “recognizes the danger to the economy.”
Its leaders are reportedly planning “a streamlined trial, if necessary, to minimize disruption,” he adds. “Any other course could harm incumbents of either party. So, the prospects for real damage remain limited.”
Even if there were to be a contentious trial, the CIO says, any damage “would show up over time, not immediately — and we could track it through the confidence surveys.”
“Like most economic and market news, real changes take time,” McMillan said. “They show up in the statistics, not in the headlines.”
Prior to the election of 2016, we saw an example of this, McMillan says.
“We could well see more of the same in 2020,” he wrote. “The economic effects would not be due to an impeachment, but to the disruption created by the overall political environment.”
And the Fundamentals?
Though an impeachment vote could come this week, a Senate trial should not be drawn out, according to the CIO.
“Whatever the outcome, it will resolve much of the current economic uncertainty due to this issue. As a result, the markets will go back to looking at the fundamentals,” McMillan said. “And, at this point, it seems as though that’s all they should be looking at anyway.”
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