The roller-coaster politics of this last week have left many investors uncertain about how politics affect long-term investment decisions. President Trump famously tweeted that the U.S. stock market will experience a severe decline if the impeachment process goes much further. However, as we'll see, the truth tells a different story.
In addition to the impeachment hearings, the market is trying to read the tea leaves about the U.S. trade war with China, a possible troop withdrawal from Syria, and a chaotic Brexit in the United Kingdom.
What makes the prediction business more complicated is that the facts are contradictory. At the same time, we are experiencing short-term insecurity, the long-term returns have been reassuringly resilient. We have the strongest labor market in several decades, with the pace of layoffs and the unemployment rate near a 50-year low.1 Consumer spending has been extremely stable, rising an estimated 4.6% year over year. Adjusted pretax corporate profits are up 3.8% in the second quarter (the most recent period for which we have statistics). Many economists predict that the economy will continue growing to the end of the year at least.
The third quarter saw gains in the broadest market indices. The Wilshire 5000 Total Market Index—the most extensive measure of U.S. stocks—rose 1.23% in the most recent three months, and now stands at an 20.11% gain for the year.2 The comparable Russell 3000 index is up 20.09% so far this year.3
Large cap investments also showed positive returns. The Wilshire U.S. Large Cap index gained 1.53% in the third quarter, posting a positive 20.56% return so far in 2019. The Russell 1000 large-cap index has gained 20.53% so far this year, while the popular S&P 500 index of large company stocks was up 1.19% in the third quarter, up 18.74% for the year.4
Real estate investments have been looking particularly robust this year. The Wilshire U.S. REIT index, posted a 7.88% gain during the year’s third quarter, and now stands at an impressive 27.21% gain for the first nine months of the year.
To assess the long-term impact of impeachment, we need to look at the two impeachment processes that we have seen in modern times -- Bill Clinton and Richard Nixon. The two impeachments produced very different market outcomes.
President Clinton's impeachment started in December 1998, and ended in acquittal by the Senate in February 1999. The Standard & Poor’s index of 500 U.S. large companies dropped 19.4% from July 17 through September 9 in anticipation of the release of the Starr report, which detailed the case against the President. But then, during the actual trial, there was a significant rally, and the market was back on the plus side by November 28, 1998. From the date the House started impeachment proceedings to the final acquittal, the S&P 500 posted a remarkable 28% gain.
Keep in mind that during Clinton's impeachments, the U.S. economy was booming and the market was flying high amid the tech boom, the advent of the Internet and a balanced federal budget.5
President Nixon's impeachment took the markets in the opposite direction. From the date that the newspapers reported the Watergate break-in on June 17, 1972 until the President’s resignation on August 8, 1974, the S&P 500 tumbled 23.7%. 6
Other reasons for this downturn could be that during the 1973-4 period, the global monetary system was going through a wrenching correction because the U.S. left the gold standard. In addition, oil prices were spiking, leading to stagflation.
President Trump argues that the stock market is all about him. The reality is more likely that economic forces have much more influence on stock movements than the winds of politics.
Although the future of the market is uncertain at the moment, there is little reason to panic, especially if you are a long-term investor. History has shown that bull markets tend to be longer and steeper than bear markets. What does this mean when you want to accomplish long-term goals, like retirement? Holding on tight in choppy times tends to be a winning strategy.
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