Co-founder and CIO
27 November 2019
Since President Trump has been in office, we’ve seen incessant political noise ranging from Brexit, to the Italian Referendum (remember that?), and President Trump’s painful trade negotiations with China. At this point, we can practically script how the markets will behave in the face of any type of political uncertainty: there will certainly be some brief heightened market volatility, but that volatility alone won’t alter the financial markets’ trajectory in the medium and long term.
The latest noise is President Trump’s potential impeachment. We decided to look back at 4 separate instances of presidential impeachments to see what the markets could have in store for us this time around. Spoiler alert: An impeachment’s effect on the markets is no different than that of other political noise.
History has taught us that for a single event to alter the long-term trajectory of asset prices, it would have to exert significant and lasting influence on economic growth and inflation, and subsequently on the markets. When we analysed past presidential impeachments, most notably the Clinton and Nixon impeachments, we found that macroeconomic environments, not political events, are what hold the long-term weight in the markets.
Table I shows that notable presidential impeachments fail to have a significant and lasting impact on the long-term trajectory of asset prices.
Sources: Data for stocks, growth and inflation from Bloomberg. The respective indices for “Stocks” are S&P 500 (US), Bovespa (Brazil) and Kospi 200 (S.Korea). For each country, growth is proxied by year-over-year percentage change in industrial production and inflation by the headline CPI.
Let’s take a look at 4 impeachments and their effects (or the lack thereof) on the markets.
The most recent US political scandal being taken to court was when President Clinton was impeached by the House of Representatives in December 1998 for allegedly misleading a grand jury about his extramarital affair with Monica Lewinsky in the White House, and then subsequently persuading others to lie about it1. After the trial, the Senate acquitted President Clinton of both charges. An apology seemed to suffice, as he then went on to complete his 2nd term in office.
As colourful as the Clinton affair was, the real culprit behind the sell-off in global equities at the time was the Russian Crisis of August 19982,3. While the Clinton impeachment was underway, the US Federal Reserve had also been busy with 3 separate rate cuts of 25bps each between September and November 1998. The rate cuts provided cushioning for the stock market, and the S&P 500 then rebounded quickly, as seen in Figure I.
By mid-1999, it became apparent that US growth had rebounded from the lows seen in late-1998, which enabled the US Federal Reserve to raise interest rates again. Needless to say, it’s evident that the Clinton impeachment had little to no effect on the global financial markets, as they were already rebounding due to strong economic activity.
Now, let’s look at President Nixon. Although President Nixon wasn’t impeached, he faced a highly probable impeachment in 1974. President Nixon’s resignation was a pivotal moment in US politics, but the Oil Shock of 1973 overshadowed its impact on financial markets. In October 1973, members of OPEC (Organisation of Petroleum Exporting Countries) announced an oil embargo in response to the US’s support for Israel during the Yom Kippur War4. By the end of the oil embargo in March 1974, oil prices had risen from $3 USD per barrel to nearly $12 USD globally5.
Aside from spurring inflation, the oil embargo had a severe impact on costs, creating a subsequent stagnation of global economic activity. In a little more than a year from the oil embargo, between November 1973 and September 1974, the S&P 500 declined by about 41.3%.
Just as the Fed’s rate cuts impacted the economy during President Clinton’s impeachment era, it was the oil embargo of 1973-- not Nixon’s resignation-- that drove the global economy to stagflation, and in turn, lowered stock prices. Financial markets subsequently recovered as economic conditions normalised.
Macroeconomic factors, not periodic political events, dominantly drive asset returns over the medium and long term, and have a significant and lasting impact on global inflation. President Nixon resigned approximately 6 weeks before the US stock market bottomed out after months of decline. The US stock market started to stabilise 5 months after he resigned, around January 1975. By March 1975, 3 consecutive declines in CPI (proxy for inflation) were observed, providing greater evidence that inflationary pressures had abated. The strengthening economy planted the seeds for the S&P 500’s sustainable recovery.
Ultimately, the oil embargo merely coincided with the timing of President Nixon’s near-impeachment, and the near-impeachment itself had negligible effects on the economy.
More recently, in August 2016, the Brazilian Senate removed Dilma Rousseff from office after finding her guilty of breaking Brazil's budget laws6. Then-Vice President Michel Temer replaced Rousseff as the new President of Brazil.
As illustrated in Figure III, Dilma Rousseff’s impeachment had little effect on the Brazilian stock market (proxied by the Bovespa Index). Although industrial output was contracting, the decline in industrial production was already rapidly slowing down since January 2016 (i.e. YoY percentage change in Brazilian industrial production was reversing course). At the same time, inflationary pressure was easing off the highs observed in December 2015. In other words, Brazil’s real growth rate started improving around late 2015, and was the primary driver of the outperformance in Brazilian equities. We can also credit this outperformance to the quickly recovering global markets, post-Brexit. The recovery spurred investor confidence for the emerging markets, including Brazil.
Closer to home, South Korean President Park Geun-Hye was charged with harbouring interventions to the presidency from her aide, and was impeached in December 2016, when 234 of the 300 National Assembly members voted in favour of her impeachment. On 10 March 2017, the court upheld the impeachment in a unanimous 8–0 decision resulting in the removal of Park from office.
Throughout the fiasco, economic factors in South Korea provided little guidance about the domestic economy. As shown in Figure IV, South Korean CPI inflation was hovering within a tight range, while there were also large swings in industrial production (YoY percentage change). Due to South Korea’s export dependency, international forces were actually the dominant driver of economic growth in South Korea. With the global economy already on the mend, Park’s impeachment exerted little influence on the proxy Kospi 200 Index.
The markets reliably react to political noise, such as Brexit, the US-China trade wars, Trump’s impeachment probes and the US general elections in November 2020, with short-term volatility.
Though, such political events rarely alter the course of financial markets with long-term effects unless the economic environment was already in a weakened state. A presidential impeachment’s effects on the markets are no different. In each of the instances we examined, the impeachments merely coincided with economic momentum, but never influenced the trajectory or momentum that was already set in motion.
As this reflection on past presidential impeachments, as well as countless other stress tests, shows, the way to prepare our investments to endure market volatility is to look at economic fundamentals.
At StashAway, we help you navigate an uncertain future with an investment framework that builds and manages investment portfolios based on economic fundamentals powered by automation and intelligent algorithms. While we manage your portfolios to endure economic changes, you also have responsibilities in order to have a successful long-term investing plan:
Don’t let President Trump’s antics scare you out of the markets. The markets always recover eventually.
Editor’s Note: This post was originally published on 7 June 2017, and has been updated for relevancy and comprehensiveness.