The possible impeachment of President Donald Trump, according to conventional Wall Street wisdom, is a non-event for the market, which cares more about economics. But suppose, over the long term, the market’s reaction isn’t so blasé after all.
What if Trump’s entanglement in a Washington political battle thwarts resolution of the US-China trade war? There’s little doubt that the trade conflict is harming the US domestic economy. Manufacturing in the US has slumped, which many ascribe to the dispute, along with a world economy that is also slowing. And the American workforce isn’t growing as fast, with job gains coming in below expectations.
The market seems almost hardwired to trade developments. When Trump announced that a deal with Beijing was imminent, stocks climbed. When he did an about face and slammed the Chinese with new tariffs, they slid.
Stocks dipped Sept. 24 when House Speaker Nancy Pelosi opened the impeachment inquiry, then rebounded the next day, only to fall some more—mainly due to bad economic news.
Impeachment could harm investor sentiment if it scotches the chances for a trade agreement or leads to worsened tensions. If Beijing believes Trump has been harmed politically from the scandal around his call to the Ukraine’s leader about digging up dirt on Democratic presidential aspirant Joe Biden, then it may perceive no need to negotiate over the trade war.
“How much will China be willing to negotiate if they see a weakened president?” asked Art Hogan, chief market strategist at National Securities Corp. in a CNN interview. Chris Krueger, managing director at the Cowen Washington Research Group, told the network that the impeachment struggle could be a distraction for Trump that hinders any trade talks.
The two modern object lessons on stocks during impeachment come from the travails of Richard Nixon, over the Watergate scandal, and Bill Clinton’s lying about his relationship with a White House intern,.
For Nixon, from the beginning of the House impeachment inquiry in October 1973 to his resignation in June 1974, the S&P 500 fell 26%. In Clinton’s case, from the inquiry’s start to his acquittal in the Senate, the index rose 28%.
The difference, as many astute observers have noted, is that the economy was going to hell when Nixon was under scrutiny, but it was booming amid Clinton’s dire straits.
The economy will be at the heart of the 2020 election campaign. Democrats argue that the current buoyant economy (which is showing a few cracks), is propelled by the 2017 tax cut, a sugar-high that is now wearing off. Republicans say the economy should remain fine because Trump’s tax and regulation reductions will continue to boost it.
Should the economy sour anew, with China as the cause, stocks surely won’t do well.