Should Investors Worry About Impeachment?

For investors, an important question seems to be whether impeachment will affect the stock market.

But I believe that's the wrong question. To reframe the question, I looked back to see what history could tell us.

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There have been three previous impeachments of presidents, the most recent in 1998. The House of Representatives voted to begin impeachment proceedings against President Bill Clinton on October 8, 1998. That date is highlighted in the chart below.

A strong uptrend began that day. This demonstrates that impeachment is not inherently bearish.

Stocks sold off in the summer of 1998 after Russia defaulted on bonds in the final stages of an emerging market crisis that began in 1997. The crash in the summer of 1998 was also attributed to the collapse of the Long-Term Capital Management hedge fund. LTCM was a highly leveraged fund with exposure to more than $1 trillion in derivatives. Russia's default and other market moves created a crisis for the fund, and the Federal Reserve engineered a bailout to save the global financial system at the end of September.

The point is, the political drama in the United States didn't really impact the stock market.

The same is largely true for the 1974 impeachment proceedings against President Richard Nixon. The beginning of the formal process is highlighted in the next chart.

While the trend afterward is down, it's important to know that impeachment was just one of the news stories investors were dealing with in 1974.

In October 1973, the Organization of Arab Petroleum Exporting Countries (OPEC) announced an oil embargo. The embargo was targeted at nations that supported Israel during the Yom Kippur War, primarily Canada, Japan, the Netherlands, the United Kingdom, and the United States. The embargo ended in March 1974. By that time, the price of oil had increased from about $3 a barrel to $12. In today's dollars, this is the equivalent of prices rising from about $17 to $70. Inflation rose sharply, and economic growth slowed.

Nixon's impeachment was a minor sideshow in the economic crisis, and the bear market in stocks would have unfolded even with a popular president.

Andrew Johnson was the first president to face impeachment in 1868. This time period is highlighted by a rectangle in the next chart.

This data is from a 1996 paper by Yale professors Philippe Jorion and William Goetzmann, "A Century of Global Stock Markets." Johnson's impeachment came a few years after the Civil War, and the national mood was dour. Impeachment was a result of partisanship and was a minor drama in a tumultuous era.

What I'm Watching Instead
Based on history, I expect impeachment to be a minor influence in the stock market. More important will be economic news and earnings.

The trend in economic news will be a little clearer next week. Unemployment will be reported on Friday. A less widely followed indicator, the Institute of Supply Management (ISM) Report on Business will be released on Tuesday.

This report will include the ISM Manufacturing Index. Every month, the ISM surveys factory purchasing managers. Purchasing managers are on the front line of the economy. They buy the raw materials to fill new orders. If they buy too little, factories miss delivery deadlines and lose sales. If they buy too much, they waste money with excess inventory. Profits depend on purchasing managers knowing the state of the economy.

The ISM Index offers important insights into the economy and the stock market. Testing shows that this indicator is one of the few economic reports that shows a high correlation to the stock market. ISM should be up based on preliminary data ISM released last week. That would indicate the recession is at least a few months away and that would be bullish for the stock market.

Earnings will be trickling in for the next few weeks. Just a few companies report this week. Among the most important ones to watch are homebuilder Lennar (NYSE: LEN) and the payroll processing service Paychex (Nasdaq: PAYX), both of which report on Wednesday.

Expectations are low for the quarter and many companies have issued warnings that they will not meet analysts' estimates. This led to analysts lowering estimates and that could lead to companies delivering reports that beat the lowered estimates. This in a weird way is bullish for the stock market.

My outlook could change from short-term bullish to short-term bearish this week, but that will be based on the status of my Income Trader Volatility (ITV) indicator.

ITV is bullish but has been rising and is close to a crossover.

Action To Take
In the coming weeks, I expect the news to be loud and distracting.

I'll stay focused on my indicators to avoid making biased decisions. History says we should ignore the political news, as difficult as that may be, and trade the market we see instead of the one we would like to see based on our personal biases.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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