To fully understand the potential impact of impeachment on the markets, it's important to understand the nuances of the impeachment process and the historical performance of equity markets amid past impeachment investigations.
The House of Representatives has officially impeached President TrumpHistorically, equity markets have not been greatly affected by impeachment-related eventsWhile short-term volatility is expected, we believe the stock market will continue its current slow, upward trend and the economy will continue along its current trend of slow but positive growth
To fully understand the potential impact of impeachment the on markets, it's important to understand the nuances of the impeachment process and the historical performance of equity markets amid past impeachment investigations.
HOW THE IMPEACHMENT PROCESS UNFOLDS
Now that a majority of House members have voted to impeach the president, the articles of impeachment will move on to the Republican-controlled Senate, which would then hold a trial, overseen by the Chief Justice of the Supreme Court. Following the trial, the Senate would vote on whether to convict the president (and thus, remove him from office) or acquit him of the charges.
While impeachment requires only a simple majority vote in the House, conviction and removal from office requires a two-thirds supermajority vote in the Senate — 67 votes. The Senate currently has 53 Republicans, 45 Democrats and two independent members who caucus with the Democrats.
Two U.S. presidents have been impeached: Andrew Johnson in 1868 and Bill Clinton in 1998. Both were acquitted. An impeachment inquiry into President Richard Nixon led to his resignation in 1974, though he was never formally impeached.
HOW MARKETS HAVE REACTED HISTORICALLY
Generally speaking, aside from some short-term volatility resulting from new developments in the news cycle, equity markets have taken impeachment-related investigations in stride, hewing closely to existing trends.
In the year preceding President Nixon's resignation, skyrocketing oil prices (caused by the OPEC oil embargo) and interest rate hikes (intended to fight inflation) tipped the U.S. economy into a recession. In the case of President Clinton, the surging technology sector of the late 1990s kept the economy on the rise. In both cases, evidence seems to say that markets are more likely to be driven by the underlying fundamentals of the economy rather than the particulars of the political situation.
Looking at the current 200- and 100-day moving averages of the S&P 500 index, markets have lately been flat to moderately positive. Given our long-term expectations for slower, but positive, economic growth, moderate inflation, and low interest rates, we expect that trend will continue despite what's going on in Washington.
EXPECT VOLATILITY, STICK TO YOUR PLAN
In the short-term, we do expect the uncertainty in Washington to cause bouts of market volatility. Bipartisan legislative efforts, such as infrastructure spending, immigration reform or the passing of the USMA trade bill, seem unlikely to proceed. On the positive side, however, the extension of the debt ceiling this fall postponed the next two years of automatic spending cuts, which allows federal spending to stay on an expansionary path through mid-2021.
Additionally, uncertainty around trade between the U.S. and China and the impending 2020 U.S. presidential election will continue to influence markets in the months to come. How the impeachment proceedings will affect these matters is yet to be seen.
We continue to believe that equities are behaving just as we would expect during the mature stage of an economic cycle, and are not surprised that markets seem to be shrugging off the latest news and focusing on the substantive issues that have a real impact on the economy, such as trade and consumer confidence. Investors should follow suit and not get too caught up in the headlines, but rather remain disciplined in the face of uncertainty by sticking to their long-term investment plan.
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