The impeachment inquiry doesn’t change our views.

Our Top Market Takeaways for the week ending September 27, 2019.

Spotlight

D.C. drama: What does it mean for markets?

Over the course of the past week, murmurs of a whistleblower report have crescendoed to an impeachment inquiry into the President of the United States. In case you need a quick recap: An anonymous member of the U.S. intelligence community filed a complaint alleging that President Trump used “the power of his office to solicit interference from a foreign country in the 2020 election.” A call during which President Trump asked the president of Ukraine to look into former Vice President and current Democratic nominee hopeful Joe Biden’s son’s business dealings is at the heart of the controversy, although a written reconstruction of the conversation shows no explicit link between the request and the actions of the U.S. government. In light of the situation, Speaker of the House Nancy Pelosi announced earlier this week that the House of Representatives is moving forward with an impeachment inquiry.

The House investigation is still ongoing, and it’s looking like it may be a long road ahead. If the findings of the investigation prompt the Democrat-controlled House of Representatives to vote to advance articles of impeachment, things move along to the Republican-controlled Senate for a trial. In order to actually remove a president from office, 2/3 of the Senate has to vote in favor. That’s a high hurdle to clear, and, in the spirit of democracy, public opinion will likely have some bearing on the outcome.

How things will shake out remains unclear, but we wanted to comment on the potential market and economic implications of impeachment proceedings.

First, it’s important to note that we don’t have much historical precedent to work with. Impeachment proceedings against a sitting president have only been brought against Andrew Johnson (who was acquitted), Richard Nixon (who resigned before a vote took place) and Bill Clinton (who was acquitted). For the sake of modern relevance, we’ll focus on the latter two.

Spoiler alert: Impeachment has had no discernible bearing on the health of the economy nor the performance of investments. In one instance, the economy was in turmoil and risk assets were selling off. In the other, the opposite was true. Consider the context for both President Nixon’s and President Clinton’s impeachments.

Nixon:

The Watergate investigation and impeachment proceedings unfolded over a tumultuous time for the U.S. economy. In the period from 1972 when investigations began until Nixon resigned in August 1974, the U.S. was undergoing the unraveling of the Bretton Woods exchange rate system, an oil crisis was happening and rapidly rising inflation was crushing stock and bond prices.

Graphic showing the S&P 500 index level and 10-year Treasury yield during 1973 and 1974, Nixon’s impeachment period. The S&P 500 index level declined and the 10-year yield increased during this time period.

Clinton:

As the buzz around Clinton’s impeachment proceedings was hitting a fever pitch, markets were rebounding after being bruised and battered by the Asian Financial Crisis, Russian debt default and downfall of Long-Term Capital Management (LTCM). The Fed had done a mid-cycle adjustment to monetary policy by cutting interest rates (not unlike what we’ve seen them do recently), the economy was bouncing back and the tech boom was in full swing. These factors overshadowed the drama in D.C. and contributed to strong S&P 500 returns.

Graphic showing the S&P 500 index level and 10-year Treasury yield from October 1997 through 1999, Clinton’s impeachment process period. The S&P 500 index level increased and the 10-year yield was volatile during this time period.

Point being: In both instances, the economic context and investment backdrop mattered a lot more for markets than did the elevated political uncertainty from the impeachment proceedings.

So, what does the landscape look like as we head into the fourth quarter of 2019? Global growth is stagnating as pain continues to ripple through the manufacturing sector. Investors have become increasingly skittish as the tone of global trade tensions changes almost every day (maybe even every hour). Valuations are mostly at or above historical levels, and finding potential for upside returns calls for selectivity.

All this considered, the impeachment inquiry doesn’t change our views. Pessimism around the various headwinds facing global markets has been a part of the investment backdrop for some time. This has served to drive expectations low enough that positive surprises on any fronts like trade, growth or politics could be welcomed with a relief-driven rally. That said, our base case sees limited room for broad market upside from current levels. We remain constructive on investment opportunities that have exposure to secular growth trends, offer downside protection or diversification benefits, and generate yield.

Maybe we end up seeing changes in the way that President Trump navigates things like trade negotiations (potentially as a means to counter negative perception around the investigations), or the way that countries like China decide to respond…but that said, things on the trade front are already so unpredictable that we’re not sure such a change would even feel meaningful. As for the 2020 presidential elections, we could see shifts in the Democratic primary polls and dynamics of the general election. For example, favor could shift away from Joe Biden depending on what may be revealed about his own actions with Ukraine. It’s anyone’s best guess at this point. This is just another variable in the already complex calculus of U.S. politics. 

All market and economic data as of September 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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