The US Speaker of the House Nancy Pelosi announced earlier this week that the House of Representatives will launch an official impeachment inquiry into President Trump.
This represents a dramatic turn over the last few weeks. Being the Democratic House leader, Pelosi was not supportive of an impeachment effort before. The odds of removing Trump from office were always next to zero with the Republicans controlling the Senate and a two-thirds Senate super majority needed to convict him. Moreover, the negative politics associated with impeachment proceedings is unpopular with voters, and the Democrats risk galvanizing Trump’s support base before the 2020 presidential election.
What changed for the Democrats, however, was a whistleblower report that Trump had abused his power through his interactions with the Ukrainian president, which involved issues such as US aid to Ukraine and a corruption investigation of Democratic presidential hopeful Vice President Biden’s son.
The impeachment roadmap
As it was with former Presidents Nixon and Clinton, impeachment politics is highly uncertain, and the process will take months to unfold.
In former President Clinton’s impeachment episode in 1998/1999, the entire process took about four months. The House opened an impeachment inquiry on 8 Oct 1998, and impeached Clinton on 19 Dec 1998. The Senate then began its trial on 7 Jan 1999, and acquitted him on 12 Feb 1999.
Trump’s impeachment inquiry will comprise of six House committees, which will investigate if any “high crimes and misdemeanors” have been committed by the President.
In the scenario that reasonable grounds are discovered, articles of impeachment will be drawn up by the Judiciary Committee, and then voted on by the House.
If a majority of the House, currently controlled by Democrats, votes to impeach the President, the process to remove the President from office then moves on to the Senate.
The Senate will hold a trial overseen by the US Chief Justice to determine if the President should be removed from office. This is where the process today will likely break down, considering that the Senate is now controlled by Republicans (53 out of 100 seats) and that votes from at least two-thirds of the Senate are required to convict Trump.
The market implications of impeachment
Impeachment proceedings in history are rare (Nixon in 1973/74 and Clinton in 1998/99), and the market impact of past episodes are too context-specific to directly apply to the situation today.
In Nixon’s episode, the S&P500 fell 26% from the start of the inquiry to his resignation on 9 Aug 1974. But this decline can also be rightly attributed to the very difficult macro-economic circumstances over that period, including an economic recession and rising inflation due to the oil shock in 1973, and the disintegration of the Bretton Woods system of fixed exchange rates.
In contrast, during the Clinton episode, the S&P500 rose 24% from the start of the House inquiry to the day of his impeachment. To begin with, asset prices were at relatively attractive levels at the start of this period, due to earlier stresses from the Asian Financial Crisis, the Russian default crisis and the collapse of hedge fund LTCM. Moreover, the Fed was cutting rates in 4Q 1998.
The circumstances in the markets today are uniquely different. Equity and bond valuations are broadly above long-term averages although not necessarily excessive, while a global cycle of monetary policy easing is supportive of risk asset prices.
At the same time, significant uncertainties cloud the outlook, arising from international trade tensions, slowing global growth, rising recession risks, and the late stage of the economic cycle.
Impact on US-Iran relations and US-China trade talks
One also needs to ask how the impeachment process will affect US-Iran relations and the US-China trade talks.
As things stand now, judging from the absence of a US military response to the latest attacks on Saudi Arabia, Trump has signaled that he is averse to escalation and rising oil prices. His weaker position now, due to a potential impeachment ahead of his 2020 re-election campaign, could embolden Iran to further escalate the situation with even less fear of severe US retaliation. It would not be lost on both sides that the 1979 Iran hostage crisis had contributed to Carter losing his re-election campaign to Reagan.
As for the US-China trade talks, a potential impeachment could exert more pressure on Trump to strike a mini-deal before his 2020 campaign, not least because it would be a convenient reason to suspend the planned tariffs in Oct and Dec - which is expected to exert significant negative economic impact.
However, the wild card here is that Trump might decide to play up trade conflict again to distract from the impeachment proceedings, considering that aggression against China has proved positive for his popularity and a weak trade deal could give his opponents political fodder ahead of his re-election campaign.
Market outlook remains clouded
Expectations are rising for a potential Xi-Trump meeting in Santiago at the APEC summit in November and a mini US-China trade deal ahead, and this could be supportive of markets over the near term, especially as central banks globally continue to ease monetary policy.
Over the longer term, however, a mini-deal is unlikely to eliminate US-China uncertainties across trade, technology and geopolitics. In view of a clouded market outlook and the significant risks at play, our asset allocation strategy reflects a mild underweight position in terms of overall risk exposure, and we have a preference for investment strategies that provide fixed income carry over equity appreciation at this juncture.Disclaimer applicable to recommendation
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