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Market Voice: Impeachment and the markets

Ron Leven
Ron Leven
Professor of Economics at Duke University

Public hearings to consider whether President Trump has committed an impeachable act are getting underway. This month’s Market Voice analyzes the cases of Presidents Nixon and Clinton to better understand impeachment and the markets impact.

  1. To consider impeachment and the impact on markets, this month’s Market Voice has looked at Wall Street volatility during the Clinton and Nixon proceedings.
  2. A House vote for President Trump’s impeachment may lead to a sell-off, but it will probably be modest as two-thirds of the Senate are unlikely to vote in favor of his removal.
  3. Previous experience involving impeachment and the markets points to a rally once the process is completed, as shown after the Nixon and Clinton proceedings.

House Speaker Nancy Pelosi formally requested on 29 September that the House Judiciary Committee open impeachment proceedings for President Trump. This was followed at the end of October by a resolution passed in the House setting procedures for the Committee’s investigation.

How do lessons from previous proceedings help us to better understand impeachment and the markets impact?

The prior instances when U.S. presidents suffered the impeachment process were Andrew Johnson’s experience in the 1860s, with the more recent impeachment initiatives for Presidents Nixon and Clinton holding some indications for potential market impact as the hearings on Trump evolve.

Five stages of impeachment

These are the five stages of the U.S. constitution’s impeachment designated process:

Stage 1: This is the informal period not specifically discussed in the Constitution when allegations begin to circulate of an impeachable act. Various committees in Congress may be convened during this period to engage in ‘fact-finding hearings’ or ‘probes’ to determine whether there is validity to any of the allegations.

Stage 2: The Speaker of the House directs the House Judiciary Committee to hold hearings on whether the president has committed an impeachable act, and ultimately decide whether the full House should vote on impeachment.

Stage 3: The House takes a floor vote on impeachment, which requires only a simple majority. The president is considered as ‘impeached’ if there is a majority vote.

Stage 4: The Senate opens a formal trial – in which select members of the House act as prosecutors – and holds hearings to determine whether the president is guilty of acts that merit removal from office.

Stage 5: With the completion of the trial, a floor vote by the Senate is taken, with a two-thirds majority required to remove the president from office.

The U.S. constitution specifically cites two crimes which merit impeachment — bribery and treason — but also calls for removal from office if the president is found guilty of “high crimes and misdemeanors”.

It seems the latter term was intentionally vague to make the removal of the president largely a political question. Given the wide interpretation of what is an impeachable act, senators are apt to be sensitive to the bias of their constituents.

Senate committee hearings

The impeachment proceedings for Presidents Andrew Johnson and Bill Clinton made it to Stage 5, but there were not adequate votes in the Senate to remove the President from office (hence, they were considered as absolved).

President Nixon made it to Stage 4, but resigned before the Senate voted; it is generally assumed that the Senate would have voted in favour of removal. While the constitution clearly outlines the steps for removing the president, the process in practice gets complicated by parallel activity.

For instance, well before impeachment proceedings were initiated against Nixon the Senate created an independent committee to investigate allegations of White House involvement with the Watergate break-in.

The Senate Committee called witnesses and held hearings even after formal impeachment hearings were initiated.

Indeed, the recent vote by Congress to establish the procedures the Judicial Committee should follow was not a required part of the process. The timelines presented below are not limited to just the formal stages but also try to highlight other key events.

The Nixon Timeline

President Nixon’s impeachment was connected to his knowledge of a cover-up of a politically motivated break-in of the Democratic Party Headquarters in the Watergate building ahead of the 1972 Presidential elections.

Stage 1 began in March 1973 when evidence emerged that the White House was directly connected to the Watergate break-in cover-up. Stage 1 lasted for over a year with extended hearings including the creation of a Senate committee and the appointment of a Special Counsel to investigate allegations related to the break-in.

Stage 2 did not occur until 6 February, 1974 when the Speaker made a formal request to the House Judiciary Committee to open impeachment hearings. Things then started moving faster with the Committee recommending a House floor vote on impeachment on 9 May.

A vote by the floor — Stage 3 — in favor of impeaching the President was passed on 30 July.  The Senate began hearings but, in part, prodded by polls showing voters favoring his departure, Nixon resigned on 8 August.

Figure 1: Nixon impeachment timeline and the SPX

Nixon impeachment timeline and the SPX. Market Voice: Impeachment and the markets
Source: Eikon

Nixon impeachment and market volatility

The chart above shows the Standard & Poor (SPX) performance in the context of the timeline of key impeachment-related events.

The market trended lower across the whole period. But the downtrend was already two years old when allegations of a White House connection to the break-in emerged in March 1973, so there were clearly other factors contributing to the market’s decline.

Indeed, the market temporarily rallied in the wake of the start of the Senate investigation in May 1973 and the revelation that Nixon had taped all conversations that occurred in his office (a drawn-out legal battle was staged by Congress to get access to the tapes).

However, the market downturn accelerated when the House Joint Committee announced it was investigating whether an impeachable event had occurred. The market downturn further intensified when the House voted for impeachment and Nixon subsequently resigned.

The bottom that emerged in October was profound, as the market then went into a bull trend that lasted for almost ten years. It appears that the early stages of the impeachment process were largely dismissed but the latter stages possibly intensified an already declining market. Resolution paved the way for a rebound.

Watch: Eikon – The ultimate set of tools for analyzing financial markets

The Clinton timeline

The early stages of the Clinton impeachment were more convoluted than was the case for Nixon. The process originated early in Clinton’s Presidency with allegations he was involved with the Whitewater real estate mis-dealings and a Special Counsel began investigating Whitewater early in 1996.

In late 1997, Special Counsel Ken Starr was still not making much headway on Whitewater but latched onto reports that Clinton was having an affair with his intern Monica Lewinsky. Attorney General Reno’s decision in January 1998 allowing Starr to broaden the investigation to allegations related to Lewinsky significantly raised the potential for impeachment.

The prospects for impeachment were compounded when Clinton in testimony before the Congress admitted that he and Monica Lewinsky had been in a relationship. In October 1998, the process finally reached Stage 2.

The Judiciary Committee formally opened hearings to determine whether Clinton had committed an impeachable event — the specific charge was that he had lied under oath about his relationship with Lewinsky.

In December, the move to impeach was forwarded to the floor and was quickly followed by a vote by Congress to impeach. However, the story sharply departs from Nixon’s experience; in contrast to Nixon, there was no voter groundswell calling for Clinton’s departure and the case in the Senate made little headway.

On 12 February, the Senate formally acquitted Clinton of having committed an impeachable act.

The chart below shows the timeline of key events overlaid by the stock market.

Although it was perceived at the time that the decision to allow Starr to pursue the Lewinsky allegations potentially opened the door to impeachment, the market seemed unimpressed and went into a rally that stretched through the first half of 1998.

However, the market did react negatively at the time that Clinton admitted that he had a sexual relationship with Monica Lewinsky. The market shrugged off the impeachment vote perhaps because, in contrast to Nixon, public support for Clinton remained strong.

In the end, the Senate was not able to garner enough votes to remove Clinton from office and he was acquitted. Despite a different outcome from Nixon’s experience, the market again started on a new uptrend roughly one month after the resolution of the question of removal from office.

Figure 2: Clinton impeachment timeline and the SPX

Clinton impeachment timeline and the SPX. Market Voice: Impeachment and the markets
Source: Eikon

The President Trump timeline

Stage 1 of the impeachment process began in late July when reports emerged of his phone call with the President of Ukraine where he allegedly threatened to withhold military aid if Ukraine did not investigate the activities of the son of Joe Biden.

Although the House Judiciary Committee began a non-public investigation into the Ukraine call in early September, Stage 2 was not reached until 29 September when House Speaker Pelosi formally requested the Committee to determine whether the President had committed an impeachable offense.

The House passed a resolution on the rules the Judiciary Committee should follow for its impeachment hearings. We must wait for the outcome of these hearings before it will be determined if there will be a House floor vote to impeach — i.e., Stage 3.

Figure 3: Trump potential impeachment timeline and the SPX

Trump potential impeachment timeline and the SPX. Market Voice: Impeachment and the markets
Source: Eikon

While the market did drop sharply at the time of the Ukraine phone call, this is spurious and more tied with concerns about the trade wars with China and a slowing economy.

The weakness at the end of September at the onset of a formal process to impeach also seems spurious and related to end-quarter related position adjustments. Broadly speaking, the stock market has been moving sideways through this period and managed to eke out a marginal new high in the past week.

While a House vote for impeachment could lead to a reaction sell-off, it will probably be modest and temporary. The Republican control of the Senate makes the situation more akin to Clinton’s experience as it seems unlikely that two-thirds of the Senate will vote in favor of removal.

That said, it is important to keep in mind the political nature of the impeachment process, so the prospect of a vote for removal could become plausible if the polls show a heavy bias against Trump. Even more important is that even with very different outcomes, the resolution for both Nixon and Clinton was followed by market rallies.

Impeachment and the markets impact: The bottom line

Although some of the timeline events in the investigation of President Trump regarding his phone call with Ukraine were accompanied by sell-offs, this appears to be spurious and it is hard to see any clear impact on the market — indeed, the market recently touched new highs.

While the examples of Nixon and Clinton suggest there could be a knee-jerk sell-off if the House votes for impeachment, it will probably be short-lived if the Senate remains disinclined to vote for removal. The downside should be more substantial if public bias shifts markedly in favor of removal.

The Nixon and Clinton episodes also suggest that a significant market rally should ultimately emerge once this process is completed, regardless of the outcome.

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