President Donald Trump believes the market wouldn’t react well if he were to be impeached.
“If I ever got impeached, I think the market would crash,”
“I think everybody would be very poor. Because without this thinking you would see, you would see numbers that you wouldn’t believe in reverse.”
On Tuesday, Trump’s former campaign manager Paul Manafort was found guilty on charges of tax evasion and bank fraud. Also on Tuesday, Trump’s personal lawyer of illegal campaign contributions made “at the direction of a candidate for federal office.” These campaign violations involve payments made to adult film star Stormy Daniels and Playboy model Karen McDougal, women who claim to have had affairs with Trump.
As a result, some see the likelihood of Trump’s impeachment increasing. On political prediction site PredictIt, the odds of a Trump impeachment hit a three-month high, with the current odds of it happening by the end of 2019 and the probability of it happening sometime within his first term.
But Wall Street experts like JPMorgan’s John Normand aren’t convinced that a bumpy presidency would mean trouble for markets, saying that to think a Trump impeachment would derail the markets seems “hasty.”
“Fiscal stimulus, which has been the most-material driver of this year’s step up in US growth and corporate earnings, would not be reversed if the mid-term elections delivered a Democratic Congress, an impeachment process or eventually a guilty verdict,” Normand wrote in a note to clients. “Neither has the Trump Administration been proposing a deregulatory agenda comparable to Reagan and Clinton’s that requires legislation to deliver transformational change. The agenda is advancing more through personnel, priorities, rules and executive orders, which are important at the sectoral level (Financials, Energy) but not at the macroeconomic one. Thus, rethinking the direction of the economy or financial markets on the prospects for less deregulation under a preoccupied or a different President seems hasty.”
Certainly, there’s a case to be made that markets would nevertheless experience volatility in the near-term. However, there are bigger things out there driving the market in the long run.
“Perhaps there is a tactical case for reducing overweight in Equities versus Bonds this Fall, on a view that a high P/E market is typically vulnerable to drawdown before an event risk,” Normand added. “But the case for strategically underweighting stocks or shifting to long duration is poor unless one believes that prospects for US growth, earnings and the Fed in 2019 rest on this aspect of domestic politics.”
In the note, Normand emphasized that impeachment “is a process rather than an event, involving several judicial and institutional phases.” And while there have been past examples of disgraced presidencies, they need to be examined individually.
Normand noted that Nixon’s impeachment process began shortly after the First Oil Shock in late 1973 that resulted in recession and rising inflation. Nixon resigned in August 1974. Elsewhere, Clinton’s impeachment in December 1998 was “almost a non-event for the markets” as stocks and credit had already experienced the Asian Crisis, the Russian default, and the collapse of Long-Term Capital Management that summer.
The “wildcard,” according to Normand, is trade. Trump has authorized tariffs on billions of dollars of Chinese goods.
“If, at some point, Trump’s Presidency ends prematurely like Nixon’s, the lingering question for EM – or at least the China complex – will be whether the new boss Vice President Pence will be the same as the old boss.”