From the date burglars broke into the Democratic National Committee headquarters in the Watergate complex in June 1972 until the resignation of President Richard Nixon two years later, the S&P 500 fell 25 percent.
That might seem to be evidence that impeachment battles and constitutional crises are bad for business and, consequently, for financial markets. Except in that same span, the West German stock market fell by 26 percent, despite the absence of any equivalent political crisis. And during a more recent impeachment, Bill Clinton’s in 1998, the S&P actually rose 22 percent.
In the 1970s, markets weren’t responding to troubles and high drama in Washington; they were adjusting to oil embargoes and a spike in inflation. In 1998, they reflected a booming economy. And those episodes have something to tell us today as an effort to impeach President Trump begins.
On Tuesday afternoon, some analysts attributed a drop in major stock indexes, as well as a rally in Treasury bonds, to the opening of the impeachment inquiry. But these historical episodes of impeachment drama show that any moves driven by political headlines tend to be modest and short-lived. Economic fundamentals matter a lot more.
So don’t be surprised by an occasional day in which activity in Washington appears to move markets. “A surge of buying moved into the market yesterday morning after reports circulated that several high-level figures in the Nixon administration were resigning in connection with the Watergate affair,” The New York Times reported in May 1973.
But do be surprised if these effects turn out to more than temporary blips. After reviewing market and economic trends in the Nixon and Clinton impeachment periods, economists at Cornerstone Macro found that whatever had preceded the political tumult simply continued.
“Although there were days when moves were outsized, in both examples markets simply continued a trend that was already in place and attributable to other factors,” wrote Roberto Perli, Melissa Turner, and Andrea Vera in a note to clients.
They conclude that the existing market trend — reflecting a global economic slowdown particularly concentrated in manufacturing — is likely to persist, unaffected by the president’s latest troubles.
The question for a potential Trump impeachment seems less about the instant reaction to the latest developments, and more about whether there could be a feedback loop between impeachment and economic policy.
The ups and downs of the trade wars have been the major driver of economic and financial developments in 2019, much as the oil embargo was in 1973 and the dot-com boom was in 1998. And trade is an area over which President Trump has direct control.
The question will be whether the distraction of an impeachment investigation occupies his attention enough to make escalation of the trade wars less likely, or causes him to act more provocatively on that front, perhaps to try to redirect public attention.
The White House is already signaling that the impeachment effort will stymie any legislative deal-making. “House Democrats have destroyed any chances of legislative progress for the people of this country by continuing to focus all their energy on partisan political attacks,” the White House press secretary, Stephanie Grisham, said in a statement Tuesday.
In general, gridlock is perfectly fine for the economy and markets. Let’s imagine, for example, that impeachment means that the Trump administration’s renegotiated North American trade deal, known as the United States-Mexico-Canada Agreement, fails to advance in Congress. It would still be unlikely to do any major economic damage unless President Trump reacted by trying to pull the United States out of the existing Nafta deal.
Similarly, it is an open question whether an impeachment investigation will make the president too distracted to impose more aggressive tariffs on Chinese or European imports, or make him feel backed into a corner and willing to take bold but economically risky action.
All of which means that to assess the eventual market implications of a Trump impeachment, it’s not really a matter of economic analysis. It may ultimately be about behavioral analysis.