Markets and impeachment

December 10, 2019
Market news

Today, House Democrats led by Speaker Nancy Pelosi drafted two articles of impeachment against President Donald Trump. The first article includes allegations of abuse of power, and the second involves allegations of obstruction of justice. Both articles of impeachment surround allegations that the president improperly withheld aid from Ukraine in order to compel Ukraine to investigate former Vice President Joe Biden, who is a political opponent of the president.

House Judiciary Committee

The articles of impeachment next go to the House Judiciary Committee, where they will be formally voted on later this week, according to House Judiciary Committee Chairman Jerrold Nadler. If the Judiciary Committee passes both articles—which we view likely again on a party-line vote—they will be sent to the full House for a vote. The vote to impeach on the House floor will occur as soon as next week, according to reports.

Full House Impeachment

The initial impeachment inquiry on October 31 passed on a mostly party-line vote, with 232 Democrats and one Independent voting for the inquiry, while two Democrats and all 197 Republicans voting against. Using that vote as a guide, once the articles of impeachment are formally presented to the House floor, our base case is for the articles to pass the House by a similar margin.

Senate Trial

If the House votes to impeach, the process shifts to the Republican-controlled Senate where an actual trial occurs, presided over by the Chief Justice of the Supreme Court, who is currently John Roberts. During this trial the president is awarded due process and his lawyers can both call and cross-examine witnesses.

Because 67 votes — or two-thirds of the Senate — are required to convict, we view a conviction of President Trump in the Senate as a low probability outcome. The largely party-line vote in the House on the question of an impeachment inquiry provides some historical basis for our view.

Currently, the Senate is comprised of 53 Republicans, 45 Democrats, and two Independents who tend to vote with the Democrats. Assuming all Democrats and Independents vote for conviction, which itself is not a certainty, a minimum of 20 Republican Senators would need to side with Democrats and vote for conviction in order to remove the president from office.

Historical Market Reaction

If President Trump is impeached in the House but not convicted in the Senate, we expect the impeachment process to generate plenty of headlines but have a negligible impact on financial markets. History provides a guide:

During the Watergate scandal, the S&P 500 fell 14.7 percent in 1973 and 26.5 percent in 1974. The House Judiciary Committee passed its first article of impeachment on July 27, 1974 and President Nixon resigned from office on August 8th of that year (Nixon was never formally impeached but resigned when he was assured by Senators that he would be convicted in that body once impeached by the House).

But when President Clinton became the only president in U.S. history to be successfully impeached since Andrew Johnson (in 1868), the S&P 500 rose 28.6 percent in 1998 and followed up with a 21.0 percent return in 1999.

Conclusion

For us, the key takeaway is that the macroeconomic backdrop matters. During 1973-4, the U.S. was in the midst of an inflation-fueled recession, partly due to an oil price shock. Yet in the late 1990s, during the Clinton impeachment proceedings, the U.S. economy was in the midst of the dot-com boom.

We will continue to monitor the impeachment proceedings closely, and in the unlikely event that the president is successfully convicted by the Senate we will assess market outcomes and opportunities accordingly. For the present, the macroeconomic backdrop matters, and given stable inflation, strong labor markets and a healthy consumer in the U.S., we think remaining diversified across asset classes and disciplined within your financial plan is the best path for you. Please do not hesitate if we can answer any questions and we thank you for your trust.

*EBITDA is defined as earnings before interest, tax, depreciation and amortization. Think pre-tax cash profits.