- Political events matter to financial markets if they affect fundamental drivers of market performance, such as earnings growth, profit margins, and cost of capital.
- The current impeachment proceedings haven't affected those fundamental market drivers.
- The current situation is similar to Bill Clinton's impeachment in 1998, which didn't move markets.
The House of Representatives’ historic impeachment of the President on December 18 was a rare event that has only happened 2 other times: Andrew Johnson in 1868 and Bill Clinton in 1998. Richard Nixon resigned in 1974 before the House voted on his impeachment. Investors are understandably wondering what this latest impeachment means to the US stock market. The short answer is that, so far, it hasn't affected it. In fact, major US indexes closed at record highs on Friday, December 20—the same week that the House of Representatives voted to impeach.
Why impeachment hasn't rattled markets
About the expert
Jurrien Timmer is the director of global macro in Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation. He joined Fidelity in 1995 as a technical research analyst.
Stock market investors tend to be most concerned with developments that are systemically important to the economy and therefore to the stock market's fundamentals of earnings growth, profit margins, and cost of capital.
If, say, a geopolitical event or natural disaster occurs that affects economic activity on a sustained basis, then clearly that's a systemically important shock that could lead to a repricing for any companies and sectors that are affected. But if it doesn't, beyond some short-term volatility as panicky traders sell their investments, there won't likely be much sustained impact.
We've seen market stability through turbulent social and political periods, time and time again throughout many market cycles. As we've seen in the past, the stock market is generally only concerned with the fundamentals of economic growth, profitability, access to capital markets, and valuation. It's always about the fundamentals, so when something big happens, we need to look at whether that event affects them and observe how markets react.
For impeachment, the same question applies: How will it affect the economy, interest rates, and the dollar? The answer is that it hasn't so far.
While it's always possible for political developments to become market-moving events, at this point, that's not the case.
Looking at past events may yield clues
Are there any parallels that we can draw from historically? Maybe.
Andrew Johnson was impeached by the House of Representatives in 1868, and the Senate didn't produce enough votes to end his presidency. Those events predate modern stock market indexes, so comparisons are difficult.
When Richard Nixon resigned from the presidency in September 1974, the economy was in a bear market. More than the Watergate scandal, the market downturn and recession that occurred between 1973 and 1974 is typically attributed to soaring inflation, stagnating economic growth, and the gas shortages of the time. The economic fundamentals were extremely influential on markets around the world.
In December 1998, when President Bill Clinton was impeached by the House, markets were unmoved, similar to December 2019. In fact, the stock market was trending sharply higher following a global slowdown in manufacturing, a 20% decline in the stock market, and 3 successive rate cuts by the Fed.
If that sounds familiar, it's because markets have faced the same set of fundamentals since late 2018. In today's market, the fundamentals of US-China trade relations, the state of the economy after a 10-year expansion, and monetary policy from the Fed matter the most. In my view, the backdrop for stocks remains supportive on those fronts.