As a new memo of a call with the Ukrainian premier and whistle-blower report put the president under more pressure, markets seem concerned about the prospect of Donald Trump being impeached.
Impeachment talk is back. Arguably, though, it was never really gone. There has been chatter about impeachment almost since that memorable election night in November of 2016, and I wrote a blog about it more than two years ago.
Nevertheless, the dynamics of the past week that have led to the formal opening of an impeachment investigation took markets somewhat by surprise. To me, this is yet another reminder of the value of our ‘don’t predict, prepare’ approach to politics and that our New Political Paradigm theme of growing populism is very much alive and kicking.
Now what? There are two key things to keep in mind over the next few months: no one knows how this will play out; and impeachment is a political decision rather than a legal decision.
One can build a reasonable case that impeachment will galvanize Trump’s base, increase Republican turnout, and Democratic overreach could turn independent swing voters off Democrats. But a scenario of impeachment energising Democrats and the revelations turning independents off Trump seems equally likely. Tellingly, the betting odds on Trump winning the 2020 election have not budged.
The only certainties are the process and that serves as a reminder that the odds of Trump being removed from office via impeachment remain remote. A two-thirds majority in the Republican-controlled Senate is required for a conviction.
This takes us to the political constraints. It would take a significant number of Republicans to abandon a president from their own party. This is not impossible, as Watergate showed, but there have been no signs of the party abandoning the president in sufficient numbers. This is only likely to change if dropping Trump changes from being political suicide to politically expedient, so we will be keeping a close eye on Trump’s approval rating with Republicans. This is currently at a record high of 91%!
For its part, the market has not welcomed any of this news – with one small caveat I will address shortly. The reaction from investors so far has been clear: impeachment is bad. But, like with Bill Clinton’s impeachment, it is unlikely to be the dominant market driver in the weeks ahead.
At the moment, the market is trying to process the many implications of this deluge of headlines. These include:
• A legislative gridlock until November 2020 if impeachment proceeds. This would be a minor positive for healthcare stocks insofar as it relieves political scrutiny of that sector, but would eliminate any remaining hopes for an infrastructure spending package and threatens passage of the United States-Mexico-Canada Agreement (USMCA) trade deal.
• Elizabeth Warren, who was already soaring in the polls, becomes the more likely Democratic nominee for next year’s presidential election. The Ukraine story damages Joe Biden regardless of what happens with impeachment, while Warren has momentum now and so is the natural beneficiary.
• The precedent of Bill Clinton in 1996 suggests that Trump could win re-election by showing he gets work done while the opposition bickers over impeachment.
The latter possibility takes us to the caveat I mentioned earlier. If this is the narrative Trump wants to take into 2020, it may incline him to compromise more to reach a trade deal. If things get difficult for Trump, it would increase his incentives to produce a political win or distraction. Potentially the biggest win would be a trade deal with China.
We saw a hint of this yesterday when, soon after the release of the memo of his call with the Ukrainian president, Trump said that a deal with China could be struck ‘sooner than you think’. Equities quickly recovered some of the ground they had lost after earlier impeachment news flow.
One thing does seem certain: the 2020 election campaign will be very dirty. 2016 was aggressive, and 2020 was always going to be fiercer. Impeachment has only added more fuel to the fire.
Fasten your seatbelts as the rollercoaster continues.
Recent data suggest inflation in the US may have been dormant in recent years, but is not extinct. This has important implications for how we think about our fixed income strategy.