Impeachment Risk and What it Means for the Economy

December 12, 2019 | Jonathan Yung


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What are the odds of a Presidential impeachment, and what would it mean for investors?

What prompted the impeachment inquiry?

On September 24, 2019, an impeachment inquiry against Donald Trump was initiated by House Speaker, Nancy Pelosi. This inquiry was made after an anonymous whistleblower alleged that Donald Trump abused his presidential power by withholding aid to Ukraine as a means of pressuring the Ukrainian president for assistance in the 2020 election. The assistance he was seeking was in the form of an investigation into Joe Biden, for his alleged role pressuring Ukraine to fire its prosecutor general, Viktor Shokin in March 2016. This alleged pressure from Biden occurred during an investigation by Shokin’s office into Burisma, a private Ukrainian gas company. Burisma’s board members included Hunter Biden, Joe Biden’s son.

Process

The House of Representatives will decide whether the President’s actions can be subjected to impeachment under the U.S. Constitution. Impeachment is meant to occur only on the grounds of compelling evidence of “high crimes and misdemeanors.”

Since the US House of Representatives is currently under Democratic control, the likelihood of impeachment is high. Of the 235 member Democratic caucus, the vast majority has voiced their support for either the impeachment or impeachment inquiry of Donald Trump.

However, the story may end there, because only the Senate can vote to remove a sitting US President. If the House votes for impeachment articles, then they will proceed to the Senate, where an early 2020 trial may occur. Although current Senate rules suggest a trial is mandatory, there is some uncertainty as to whether it will occur, because the Majority Leader in the US Senate could attempt to change the rules to bypass a Senate trial. Assuming there is a trial, a two-thirds majority (67 Senators) is needed to convict and remove a sitting US President. If convicted, the President would be removed from office, and Vice President Mike Pence would be sworn in.

Our view is that an ultimate conviction by the Senate is unlikely, as Republicans hold the majority of the Senate, with 53 seats against the 47 seats held by Democrats and Independents. Assuming that all 47 Democratic and Independent Senators would vote for a conviction, they would still need the support of 20 Republican Senators, which seems unlikely.

What does history tell us?

There have only been three previous instances in which formal impeachment processes were launched against sitting US Presidents. However, none of these scenarios resulted in removal from office. Presidents Andrew Johnson (1868) and Bill Clinton (1998) were both impeached by the House of Representatives during their terms, however, both were acquitted by the Senate. President Richard Nixon resigned before the House voted on his impeachment.

It is difficult to conclude how markets would respond to the advancement of an impeachment inquiry, since it is such a rare occurrence. In January 1998, during the height of the Clinton-Lewinsky scandal that led up to his impeachment, the US was experiencing one of the greatest bull markets in US history. Yet, during the Watergate scandal, the S&P 500 fell 39% between 1973, when the Watergate investigations commenced and August 9th, 1974, when Nixon submitted his resignation. It is important to note, however, that this drop cannot be fully attributable to the scandal. A number of other forces were at play, such as the second devaluation of the dollar, rapid increases in price inflation and massive insurance fraud. In addition, subsequent to his resignation, the stock market rose 30% over the following 3 years.

Conclusion

We are currently in the late stage of the economic cycle and investor uncertainty remains high. This uncertainty will likely increase as the impeachment proceedings continue. As mentioned previously, there is considerable difficulty in drawing a conclusion on market reactions, should the impeachment inquiry proceed to a trial at the Senate. However, in the short term, we expect that this inquiry and the possible impeachment trial will add to market volatility given the already existing uncertainty surrounding the US-China trade war, passage of USMCA and upcoming US elections.

In the long term, we expect the US economy and equity market to remain strong, as it is typically not affected by who occupies the White House and Congress. Therefore, investors should not allow impeachment proceedings to influence investment decisions. It is wise to continue to focus on long-term economic indicators and earnings outlooks in the US.

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