Market Insider

Bull market could survive Trump impeachment effort but get battered in the process

Key Points
  • The stock market's sell-off was the largest initial reaction to headlines about a possible effort to impeach President Trump.
  • Strategists say the market is likely to react negatively to the uncertainty and paralysis caused by an inquiry, but the GOP-led Senate is not expected to go along with the effort by Democrats in the House.
  • "From strictly a market's point of view, the question will be is it likely to succeed, and if it does, what does a [Vice President Mike] Pence administration look like, and what does that mean for the 2020 election," says one strategist.
Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

If Democrats pursue an impeachment of President Donald Trump, it could rattle markets and create temporary uncertainty, but the GOP-led Senate may not go along with any effort to oust Trump or stop any of the president's economic initiatives.

House Speaker Nancy Pelosi told reporters she would have an announcement at 5 p.m. ET Tuesday, stirring speculation that it would be about an impeachment inquiry.

Stocks fell sharply, but the Dow rebounded from its lows after Trump tweeted that he would release the full declassified transcript of his conversation with Ukraine's president. The market fell again when The Washington Post reported that Pelosi would announce a formal impeachment inquiry. The market's sell-off was its largest reaction so far to any headline about impeachment and Trump.

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Wells Fargo Securities' Chris Harvey on markets now

"From strictly a market's point of view, the question will be, is it likely to succeed, and if it does, what does a [Vice President Mike] Pence administration look like, and what does that mean for the 2020 election," said Ed Keon, chief market strategist at QMA. "It is unlikely to succeed because of the composition of the Senate. If you net it all out, the end result is likely to be the status quo. I don't expect that to have a big effect on the market."

The wrangling between the two parties and legislative paralysis that could result, as proceedings drag on, would be a negative for stocks.

"My sense is the impeachment is well ahead of the country. I don't think it's going to be successful, and ... I don't think the country is behind it. It just adds to uncertainty." said Marc Chandler, global market strategist at Bannockburn Global Forex. "In some ways, what we're saying is Democrats might push for impeachment. Impeachment isn't too popular. Trump would likely have a second term. I think the market would like that. Many people think Trump delivered the goods — tax cuts, deregulation, and conservative judges."

Tom Block, Fundstrat Washington policy strategist, said the impeachment process could backfire on Democrats, just as the Clinton impeachment effort backfired on Republicans.

"I think impeachment doesn't hurt Trump. Once the market thinks about it, it's just a side show. [Senate majority leader] Mitch McConnell and his crowd would not impeach Trump," said Block.

He said Trump would be comfortable fighting back at an impeachment process.

"Trump doesn't mind talking about that. It's like attacking Hillary, attacking 'The Squad.' In his own mind, he doesn't think he did anything. He said 'I called them, so what,'" said Block. "He feels much more comfortable talking about that. His big problem is his people who are basically Trump supporters and can't get health insurance. He doesn't speak as fluently when he's talking about real issues."

Art Hogan, chief market strategist at National Securiities, said there is a risk that the impeachment process could hurt U.S. China trade talks. "This is going t be news that spills out over time, but I can't imagine the start of this process improves the tone of the U.S.-China trade talks…if I'm China I feel empowered. This is a market that's been hanging on that tone getting better and I think it just got worse on the president's hawkish tone at the UN and this process," said Hogan. Earlier Tuesday, Trump spoke at the U.N. and criticized China's policy on technology transfers.

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Pelosi announces opening of formal impeachment inquiry, Trump responds

If there is an impeachment process, it could be much like that of President Bill Clinton, who was impeached by the House but not convicted by the Senate.

With President Richard Nixon, "they had several Republicans already on the impeachment side," said Art Cashin, UBS' director of NYSE floor operations. "That started out kind of murky and then it went directly down hill." He said the market reaction was negative in the buildup of the Nixon impeachment effort. Nixon resigned in 1974 before he was actually impeached.

Strategas analyzed how the market reacts around impeachments and found in its report last year that the anticipation of impeachment is worse than the actual event.

"Stocks came under great pressure after President Nixon fired Watergate special prosecutor Archibald Cox in October 1973, but it is important to remember that this was in the context of a secular bear market. The prior peak in the S&P 500 occurred in 1966," according to Strategas.

By the time it got to the effort to impeach Nixon, the markets had already dealt with the 1973 Arab-Israeli war, the spike in oil prices followed by a big jump in inflation, and the collapse of the Nifty Fifty stocks. The stock market came under even more pressure when the House began its move toward impeachment.

Special prosecutor Ken Starr's investigation of Clinton had little lasting impact on the market or the economy. The S&P fell nearly 20 percent in the six weeks leading up to the release of the Starr Report, but it rose 28 percent from the time the House started impeachment proceedings on Oct. 8, 1998, to February 1999, when the Senate acquitted him.

In the case of Trump, there is concern that he withheld aid from Ukraine while demanding the country investigate Democratic presidential candidate former Vice President Joe Biden and his son.

Trump's tweet that he would turn over the transcript of his call with Ukraine's president turned around the market, but it fell again after news organizations reported Pelosi planned an impeachment inquiry.