With Impeachment in the Air, Should You Worry about Your Investments?Submitted by Bernhardt Wealth Management on October 7th, 2019
It seems as though every time there’s a new headline—whether it comes from Washington, DC, Beijing, London, or somewhere else—the stock market goes through gyrations. Especially these days, with the possible impeachment of President Trump claiming most of the news cycle in the U.S., we see frequent reactions in the financial markets. Naturally, many investors may be wondering if the impeachment process, whatever its outcome, could have an effect on the value of their holdings.
It seems worthwhile to remember that the presidents of the United States, no matter which party they come from, do not historically have much control over the direction of the financial markets. This has been widely reported, and historical data confirms it; it just doesn’t seem to matter which party is in the White House; the markets tend to respond to factors that do not correlate with the party affiliation of the President of the United States. Despite this, the “conventional wisdom” that Republican presidents are good for the stock market and Democratic presidents are bad just continues to find its way back into the public’s attention.
In much the same way that knowing the U.S. president’s party affiliation does not allow us to predict the movement of the stock market, the impeachment of a U.S. president is also not necessarily a good way to tell which direction the markets are about to move. The two most recent historical examples—one involving a Democratic president and one a Republican—bear out how risky it is to make assumptions about how the markets will respond to an impeachment.
First, let’s consider the 1998 impeachment of President Bill Clinton. Initially, in anticipation of the Starr Report and the subsequent beginning of impeachment proceedings in the House, the markets fell about 19%. During his Senate trial, in which Clinton was ultimately acquitted of the charges, the market experienced a significant rally, and by November 1998, the entire previous loss had been wiped out. In fact, from the beginning of the matter to its end in February 1999, the S&P 500 racked up a 25% gain.
Now let’s look at the other side of the coin. From June 17, 1972, when the Watergate break-in was first reported, through the hearings, and until President Nixon’s resignation on August 8, 1974, the S&P fell almost 24%.
Now let’s consider the economic context in which both these events unfolded. During the Clinton presidency, the financial markets were in a period of strong growth, much of which was being driven by rapid developments in technology and the explosion of the internet. During this same period, the United States also had a balanced budget. During the Nixon period, on the other hand, the economy was dealing with the fallout from exiting the gold standard, skyrocketing oil prices, and stagflation.
This information suggests a question: Do you believe the stock market movements during these two periods had more to do with the possible or actual impeachment of the president or with the economy?
While it is true that President Trump has predicted that if he is impeached, the financial markets will implode, history suggests that there are many factors at work other than the party or reputation of the occupant of 1600 Pennsylvania Avenue. It is certainly possible that the markets could fall if he is impeached; it is also possible that they will move sideways or even rise. But what is certain is that no single factor—even the impeachment of a president—will ultimately drive the financial markets one way or the other.
The takeaway for investors is this: avoid being distracted by things you cannot control, and instead concentrate on the things you can control. Maintain broad diversification, review your asset allocation, and rebalance your holdings when appropriate. And if you have any questions or would like additional insight, don’t hesitate to reach out to a professional, fiduciary financial advisor. We answer questions about current events and its impact on a client’s portfolio all of the time.