“The President, Vice President and all other Civil Officers of the United States, shall be removed from Office on Impeachment for, and Convictions of, Treason, Bribery, or other high Crimes and Misdemeanors.”
Article II, section 4 of the United States Constitution
On Sept. 24th, House Speaker Pelosi announced an impeachment inquiry of President Trump. This marks the fourth impeachment inquiry in U.S. history (Presidents Johnson 1868, Nixon 1974 and Clinton 1998) with only President Nixon leaving office upon resigning. Polls out last weekend show a majority of Americans now support the inquiry for the first time. Unsurprisingly, the polls also reflect the same partisan divide as Washington itself. We consider impeachment as a secondary factor within the context of many issues impacting markets today. The political discourse around impeachment is of little economic use. Its lasting impact on policy is of primary economic interest.
Impeachment follows a simple three-step process:
Impeachment Inquiry: This was launched this week by Speaker Pelosi and on display Sept. 26 with testimony from Acting Director of National Intelligence Joseph Maguire.
Articles of Impeachment: “An impeachable offense is whatever a majority of the House of Representatives considers it to be at a given moment in history.”
Gerald R. Ford, 38th president of the United States
If the inquiry identifies/substantiates what the House believes to be an impeachable offense(s), then a simple majority vote by the House can impeach the president, just as they did with President Clinton in 1998.
Articles of Impeachment require 218 votes to reach a House majority and as of Sept. 30, it appears the votes are there. Impeachment is a calculated risk on the part of Democrats, who in 1998 saw Republicans head into 1998 elections expecting a 40-seat gain only to sustain a five-seat loss with heavy Democratic turnout supporting President Clinton. The House is expected to move toward the articles swiftly.
Senate Trial: A president can only be removed from office once the Articles of Impeachment go to trial in the Senate with a two-thirds majority vote (67 votes) required for conviction and removal. The trial is presided over by the chief justice of the Supreme Court.
With just 47 votes in the Senate, Democrats know they will need 20 Republican senators to cross the aisle and vote for a conviction in the event of a House impeachment. This is highly unlikely without a smoking gun.
As of now, Republicans are defending 23 Senate seats in 2020 while Democrats are defending just 12. The chart below shows states with 2020 Senate elections and the margin of victory/defeat for President Trump in 2016. States won by Trump are in red. Alabama may be the best odds of a pick-up for Republicans whereas states narrowly won by Trump in 2016 (Colorado, Maine, Arizona and North Carolina) could be in play. There’s a lot of daylight between now and November 2020, but the Senate outcome could be heavily influenced by the impeachment outcome.
Bottom Line: Both President Trump and Vice President Biden have been bruised by last week’s developments. Based on current information, a repeat of 1998 is a strong possibility with a House impeachment but a Senate acquittal. In that event, Trump would not be forced from office. The stakes are very high for each side and neither has a slam dunk. This story will continue to develop in real time.
Impeachment is an ugly business with more historic than economic relevance. In the chart below we overlay the behavior of the S&P 500 index during similar time frames surrounding the Nixon (red) and Clinton (orange) impeachment inquiries. If impeachment were the only common factor during these tumultuous periods, one might expect the lines to look very similar, but as you can see, they don’t. This illustrates that impeachments are only subplots within a given economic cycle.
During the Nixon Inquiry:
- The S&P 500 hit an all-time high 15 months before the inquiry.
- The OPEC oil embargo and recession began seven months prior to the inquiry.
- Watergate hearings began one year before the inquiry.
- Recession ended nine months after Nixon resigned.
During the Clinton inquiry:
- The Starr investigation occurred within a roaring bull market.
- Instability in Asia and Russia with the failure of Long-Term Capital Management immediately preceded the inquiry.
- Bailouts by the IMF and Fed restored world economic order.
- Markets correctly assumed the Democratic Senate would not convict President Clinton.
Takeaway: The Nixon and Clinton impeachment inquiries occurred during very different economic cycles from deep recession to robust expansion. Today, the impeachment inquiry represents just one more brick in a wall of concerns that have been front and center for over a year now, such as slowing global growth, Fed policy, trade wars and geopolitical tensions. Any market impact from the impeachment inquiry would likely coincide with deterioration in these other factors. A Senate conviction would change the near-term outlook but remains unlikely.
Policies over Politics:
Markets pay closer attention to Washington policies than they do partisan politics. For example, the market rally in 2017 was in part led by anticipated corporate tax cuts in 2018 and the resulting boost to earnings. More recently, health care stocks have significantly underperformed other market sectors because of the unknown impact of potential universal health care proposals and prescription drug pricing controls. Here are some of the higher profile policy issues impeachment could impact:
China Trade Policy: We see two potential scenarios.
- A trade win for Trump would be the economic win the markets need. This is the most likely scenario as negotiations begin in two weeks. Any deal would be diluted in the interest of getting it across the goal line.
- A trade war escalation by Trump would be a scorched-earth tactic to strengthen his base and galvanize support heading into 2020. This would be high risk with little return.
President Xi of China has patience on his side. Any near-term deal would reflect his pain threshold. No trade deal indicates a willingness take a chance on the 2020 election outcome.
USMCA (NAFTA replacement): Rust belt states that voted for Trump in 2020 (Michigan, Wisconsin, Ohio) have seen recent manufacturing weakness impact their state economies. Trump wants this win to retain his base, and Pelosi had recently signaled willingness to make a deal. This is still on the table but could be delayed.
Budget Deal: The recent extension to Nov. 21st sets up a potential showdown that risks another government shutdown. The budget has passed but the appropriations have not.
Prescription Drug Pricing: This is an area where Trump and Pelosi have had some common ground. The impeachment inquiry may not derail a deal, but it could impact whether Trump signs a House bill or acts unilaterally without Congressional support.
Only time will tell if the impeachment inquiry will backstop Democratic initiatives for 2020 or backfire like it did on Republicans in 1998. We think impeachment proceedings will be fast tracked and move more quickly than the 1998 experience where four months elapsed between the impeachment inquiry and the ultimate acquittal of President Clinton. Primaries begin in 120 days for Iowa, New Hampshire, Nevada and South Carolina before Super Tuesday on March 3rd where 16 state primaries occur. That’s when markets will become more alert to policies of leading candidates.
Conclusion: We expect the impeachment proceedings to have more historic interest than economic relevance. Impeachment is a small subplot within a larger economic story. Global growth remains subdued but continues to be led by the U.S. and its healthy consumer base boosted by record low unemployment. There will be a confluence of headlines in October such as trade, impeachment, Brexit, earnings and the consumption tax hike in Japan that individually or collectively could elevate market volatility in an historically volatile part of the calendar. We expect news flow to get worse before it gets better so when in doubt, watch a ball game instead.
Jeff Terrell, CFA
Senior Vice President, Chief Wealth Market Strategist
Jeff is a Chartered Financial Analyst (CFA) with more than 20 years of bank chief investment officer experience. He specializes in dynamic asset allocation and portfolio construction. Jeff is the author of BB&T Wealth’s Market Monthly and Market Spotlight and leads BB&T Wealth investment communication efforts.
Sources: Strategas, ISI Evercore, Morningstar, Federal Reserve Bank of St. Louis, National Bureau of Economic Research
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