On Dec. 18, 2019, President Donald Trump was impeached by
the House of Representatives on two counts, becoming the third US president to
be impeached in the history of the United States. For context into the impact
that past presidential scandals have had on the stock market, we point you back
to our thoughts first published Oct. 7, 2019, which still hold true today.
On Saturday evening, Oct. 20, 1973, US President Richard Nixon ordered Attorney General Elliot Richardson, Deputy Attorney General William Ruckelhaus, and Solicitor General Robert Bork to fire independent special prosecutor Archibald Cox, resulting in the resignations of Richardson and Ruckelhaus and the dismissal of Cox. In the month after this so-called “Saturday Night Massacre,” the US equity market, as represented by the S&P 500 Index, fell by more than 10%.1 By the time Nixon resigned almost a year later, US equities had fallen by 26%, and ultimately by 39% at the trough.1
Fast forward to October 2019, when House Democrats have
begun to form an impeachment inquiry into President Donald Trump. Investors may
read the above paragraph and decide to scale back or eliminate equity positions
and sit this one out. After all, markets don’t like uncertainty, and this
latest scandal could be with us for some time. The good news, however, is that
political surprises and machinations have typically produced short-term market
implications that prove to be mere blips in the long-term advance of US stocks.
the real story for investors?
I would implore tactically-minded investors to spend
more time getting the bigger macro stories right rather than attempting to
adjust their portfolios based on Washington intrigue. The big macro story in
the 1970s wasn’t the Nixon impeachment; it was instead high and rising
inflation. The growth in the Consumer Price Index rose from 3% to 12% between
1973 and 1974.2 Interest
rates spiked and the equity multiple that investors were willing to pay for
corporate earnings plunged. It wasn’t Watergate that fell the market, it was
runaway inflation. For what it’s worth, the cumulative US equity return from
the beginning of Nixon’s second term, through his resignation and pardon, to
the day President Gerald Ford left office in January 1977, was +15%.1
Not great, but not a disaster.
Now, juxtapose the big macro stories of the early 1970s
to those that were in the background during President Bill Clinton’s
impeachment in the 1990s. In this instance, inflation was benign (remember The
Great Moderation?), the US Federal Reserve was easing monetary policy, and
investors were paying fancy equity multiples for potential future growth. Yes,
the market declined peak to trough by 21% in the days following Clinton
admitting that he “misled people” and Monica Lewinsky agreeing to cooperate
with the independent counsel. Nonetheless, the market had more than recovered
by the time the US House of Representatives impeached Clinton. The cumulative
market advance during Clinton’s second term was +82%.1
I’d argue that the current environment more closely
resembles the mid- to late-1990s than the early 1970s; although I’d note that
unlike in the 1990s, investor enthusiasm for stocks is currently not yet
irrational, in my view, nor are stocks expensive compared to bonds.
Stocks rebounded after Nixon’s resignation and Clinton’s impeachment
past the headlines
For longer-term investors, I believe it is most
important to have a plan and stick with it. If you invested $100,000 in the S&P
500 Index on the Friday before the Saturday Night Massacre, it would have been
worth $66,000 by the end of 1974.3 By the time Clinton was impeached,
it would have been worth $2.6 million.3 Today, $10.4 million.3
As Bill Clinton famously said, “Follow the trend lines,
not the headlines.” The headlines will always be troubling, as long as human
beings are attracted to negative news, and I have no doubt that more negative
headlines will be coming our way in the days ahead. Fortunately, history shows
us that the trend lines tend to get better. Simply consider the vast
improvements in the quality of life between 1973 and today for most inhabitants
of Planet Earth. In my view, history tells us that equity markets ultimately reflect
that improving condition rather than remain mired in the negativity of our
1 Source: Bloomberg, L.P.
2 Source: Bureau of Labor Statistics
3 Sources: Standard & Poor’s, Bloomberg, L.P.
Blog header image: Searagen / Getty
S&P 500® Index is an unmanaged index considered representative of the US
The consumer price index (CPI) measures
change in consumer prices as determined by the US Bureau of Labor Statistics.
Past performance is no guarantee of future
All investing involves risk, including risk of
opinions referenced above are those of the author as of Oct. 7, 2019. These comments should not be construed as
recommendations, but as an illustration of broader themes. Forward-looking
statements are not guarantees of future results. They involve risks,
uncertainties and assumptions; there can be no assurance that actual results
will not differ materially from expectations.