Impeachment and the U.S. Stock Market: Historical Precedents
September 24, 2019
A decline today in U.S. share prices has been attributed in part to a rising perceived risk that impeachment proceedings will be brought against President Trump. In the flexible dollar rate era, only two presidential impeachment events have occurred, and the performance of the U.S. stock market in those two examples could hardly be more disparate.
At the time of the break-in to Democratic Party headquarters in the Watergate Hotel on June 17, 1972, the Dow Jones Industrial Average was well into a bull run that began at 631 late in May 1970. Perceived initially as a third-rate burglary, Watergate was a non-factor — politically and market-wise — during the 1972 election, and the Dow continued to crest to 1052 reached on January 11, 1973. Early in 1973, the original depiction of the crime started to unravel, especially after James McCord admitted perjury. President Nixon eventually resigned on August 9, 1974, but share prices did not bottom out immediately. The bear market between January 1973 and December 1974 saw the Dow tumble 45% to 577.
Rumors of former President Clinton’s affair with a White House intern surfaced very late in 1997 and caught the public’s attention in mid-January 1998, when findings in the Starr Report were leaked gradually to the press including assertions that alleged evidence existed that the president may have lied under oath about his relationship with the woman. Clinton would later modify his story, and impeachment proceedings were initiated on October 8, 1998. A lame duck House of Representatives approved two articles of impeachment on December 19, 1998 and sent such to the Senate for trial. But less than two months later, each of those articles of impeachment failed to secure a majority of support, let alone the two-thirds threshold required by the Constitution for removal from office.
The Dow was also in a bull market when the Clinton impeachment story began, ending 1997 at 7908. On October 8, 1998 when impeachment hearings began, the Dow was only 2.2% below its end-1997 level, but all of that dip and more had been recovered by the time articles of impeachment were approved by the House in mid-December of 1998. The case simply didn’t seem to merit removing the president, and by the time of the Senate vote in mid-February, the Dow had risen further. At 9275, it was in fact 17.3% above the end-1997 level.
The different financial market outcomes can be explained not only by the perceived likelihood of a presidential abdication. Context matters immensely. The Watergate saga was juxtaposed against a severe bout of stagflation caused by the first OPEC oil price shock. It also overlaid the transition from a post-war period of fixed exchange rates to a new and untested environment of flexible dollar rates determined by market forces. The late-1990s were a period of robust U.S. economic growth of around 4% per annum, yet stable inflation that permitted the Federal Reserve to accommodate the boom.
The context now is more aligned with the Nixon impeachment than Clinton’s. There is concern that U.S. growth is slowing within the context of the weakest global economy since the Great Recession. Anxiety is reinforced by worries that fiscal policy and monetary policy are poorly positioned to provide a counter-weight if the U.S. were to tip into recession. And America’s society cohesiveness hasn’t been as fragile as now since the Vietnam War or perhaps even the Civil War.
Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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