Isn’t that a peach? In this week’s news, the legal drama of two of President Trump’s campaign associates separately reached conclusions which leads them to face jail time. Former campaign manager Paul Manafort was convicted of tax evasion and bank fraud in a court in Virginia while personal attorney Michael Cohen pled guilty to tax evasion and campaign finance violations in a court in New York virtually at the same time. A look back at the Clinton days shows how a special investigation (like the one underway with Mueller regarding Russia’s alleged interference with elections) can wander off in any direction since it started with reviewing real estate transactions and ended up in the President’s sex life. Naturally, news and political circles shot to speculation on the probability of impeachment. As speculation is another word for gambling, we cannot help but check the bookies (mostly outside the US) to look for a change in odds. According to PaddyPower.com (an Irish bookmaker), the odds of Trump being impeached tightened from 50% to 66%, a more modest increase than the odds of Trump’s presidency ending before 2018 (moved from 10% to 25%, or more than double the probability). Granted, the bookies called the election wrong too (betting odds are influenced by total dollars moving more so than the number of individual bets which is how votes count 1-for-1 in a general election). Also, we doubt, given the comfort President Trump has with confrontation, that he would resign the job lightly in the face of controversy.
Naturally, the question that comes to mind for investors given this speculation is what the impact may be on the economy and financial markets should an impeachment process be started at some point in the future. There has been a myriad of historical analysis (often focused on Nixon and Clinton, though some look back as far as Andrew Johnson in 1868). With Nixon, the S&P 500 suffered a significant drawdown as the scandal unfolded. However it is important to remember that the backdrop was set in a secular bear market with an oil embargo and the US 10yr Treasury yield rising from roughly 7.5% in mid-1972 to a peak over 14% in late 1974 – a far cry from today. With Clinton, there was also a drawdown in anticipation of proceedings where the duration was measured in months as the market recovered swiftly after. Again, the backdrop is important as the internet boom was in the later stages but ongoing. It is impossible to know whether these two data points will hold true should there be a repeat. As always, opinions are everywhere and often influenced by personal views.
From our vantage point, we recognize that as investors (as opposed to voters) we are policy-takers not policy-makers and thus we center our attention on what is likely versus what one person or another may desire. Financial markets in the short-term are emotional, so it would not be surprising to see an equity market drawdown driven by fear should expectations rise of an official impeachment effort. That said, the equity market is supported long-term by the fundamental earnings power of companies underpinned by broad economic conditions which currently remain solid. In the US, for example, initial readings of Q2 GDP show a greater than 4% annualized growth rate and equity earnings growth has topped 20% year-over-year for the past two quarters. While interest rates are rising, at under 3% on the 10yr Treasury yield they remain modest relative to historic comparisons.
As much as one politician or another would like to claim credit (or avoid blame) for economic performance, financial conditions have a trajectory that is years in the shaping and so often overlaps many policy-makers’ tenure. In the medium-term (1-2 years), the fiscal support provided by tax cuts is unlikely to be rolled back even with a change in Congressional make-up at the mid-term election. In addition, whether Trump stays in office or if Vice President Pence is required to step in, the approach to economic policy in the Executive branch will remain consistent until the next general election in 2020. Therefore, an opportunity in the next few months presented by a fear of impeachment would be a ripe buying opportunity.