C.J. Lawrence Weekly – Fundamentals Drive Stocks Even During Periods of Political Turmoil
Analyzing precedence is not a particularly insightful exercise when looking for correlations between market behavior and periods of U.S. Presidential turmoil. Historically, markets have looked through Presidential crises remaining focused instead on the markets’ underlying fundamentals. The current scenario looks to be following the same rulebook. While formal impeachment proceedings against President Trump have not commenced, the current path puts the country in a position it has been in only three times in its history. But those three periods share very little in common in terms of economic and market backdrop. The nation’s first constitutional crisis involving a sitting U.S. President involved the impeachment of President Andrew Johnson in 1868. Johnson was impeached for refusing to abide by legislation prohibiting the replacement of cabinet members. He was acquitted by one vote in the U.S. Senate and did not seek re-election. Despite the controversy, Johnson’s presidency was marked by a period of economic growth fueled in part by post-Civil War reconstruction. No formal stock market existed at the time, but historical accounts suggest that industrialization accelerated, the economy expanded, and the country’s business base diversified. No disruption was noted as a result of the high-stakes Presidential trial playing out in the re-born nation’s capital.
More than a century later, in the fall of 1973, Articles of Impeachment were introduced against then President Richard Nixon following the “Saturday Night Massacre”. Nixon originally fought the charges but resigned in August of 1974 when even his closest allies abandoned him, and impeachment looked inevitable. Political tumult created elevated levels of uncertainty in the 1973-1974 bear market, but tense geopolitical and economic events likely played an even larger role in the market’s and economy’s struggles. In October of 1973 OPEC declared an oil embargo on the west, U.S. GDP growth was plunging, and inflation was soaring. The stock market took its cue from these events losing over 42% of its value over the next twelve months. Thus, the Nixon economy, rather than the Nixon impeachment controversy, looked to be the honey pot feeding the bear.
Meanwhile, the economic and market backdrops surrounding President Bill Clinton’s impeachment offer a stark contrast to Nixon’s. The mid-to-late 1990s was a period of robust economic growth and transformation. The Internet revolution was underway and, by the late 1990s, ecommerce was evolving. Inflation was tame and annual GDP growth consistently exceeded 4.0%. The stock market looked through the Clinton impeachment controversy and surged 48% (as measured by the S&P 500) in the year following the introduction of Articles of Impeachment in Congress. Where the current impeachment inquiry leads is anyone’s guess. One area of consensus, however, is that as a result, the prospects for bi-partisan action on infrastructure, prescription drugs, and privacy are dim. That may catch the attention of issue-centric investors, but the broader market looks laser focused on the issues surrounding trade, interest rates and recession risks. History suggests that fundamentals will continue to drive market returns even as the political drama in Washington unfolds.