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Impeachment Articles Are Filed.  Do Stocks Care?

Impeachment Articles Are Filed. Do Stocks Care?

December 19, 2019
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Yesterday, in an historic event, US House Representatives voted in favor for the impeachment of President Donald Trump and the stock market couldn’t be bothered.  Today, off of the heels of the 3rd impeachment filing in our country’s history, markets sored sending the averages ever higher to close at all-time highs Thursday afternoon.

In many of my past messages to clients, I expressed concerns about being sure that investment portfolios are balanced and that investment risk is in check at all times.  During 2019, we have had plenty of opportunities to responsibly take profits and rebalance investment portfolios to reflect client objectives and manage overall risk.  So here we are once again…If you haven’t looked at your investments and made adjustments in accordance with your goals, this is a huge opportunity to do so.  Remember the old adage:  buy low – sell high?  Well, it’s not as easy as it sounds.  Behavioral finance tells us that too many investors, when the markets are hot, get lulled to sleep (see: Complacency Is Not a Strategy) and forget that as asset values increase, investment risk increases too.  With markets hitting all-time highs and the looming recession that was a “lock” 4 months ago ostensibly disappearing before our eyes, the opportunity to lock in some gains is upon us.  Yes, the market can keep going higher but if your portfolio is lop-sided due to the enormous run 2019 has seen, it’s good to take some off the table. 

So for Pete’s sake sell something!  Take a profit!  Remember that trees don’t grow to the sky!  Ok.  Maybe wait until 2020 to do that – don’t pay unnecessary capital gains taxes (unless you’re selling in a retirement account).

What do we need to look for now that impeachment is filed, the markets are screaming higher, and interest rates have been slashed again? 

Well, impeachment is not inconsequential, but we have had a great deal of time to digest this news and the signals coming out of DC were loud and clear.  Trump’s impeachment is priced in at this point and for now, stocks are “impeachment-agnostic” especially since it is broadly expected that the President will be acquitted in the Senate.   

With the economy still very strong, low interest rates and an accommodative Federal Reserve, the activity in DC seems to be completely irrelevant and, economically speaking it does make sense for the markets to ignore the noise.  But is there a bigger risk around the corner and can history be a guide?  President Trump has, through multiple Tweets and in his campaign rallies, expressed that if he is removed from office the stock market would crash.  While that very well may be the case, let’s look back in time to see how impeachment proceedings have impacted markets previously.    

Articles of impeachment were filed against Richard Nixon in 1973 but weren’t voted on due to his resignation from office after a release of the “Smoking Gun Tape” in the following year.  When Nixon stepped down, the markets tanked as investor confidence dropped and the economy went deeper in the hole while inflation spiked and oil prices soared.   To the contrary, when Bill Clinton was impeached in 1998, markets were strong because economic fundamentals were very sturdy and corporate America was in great shape.  Clinton’s legacy was saved by the “economy, stupid” and Nixon goes down as one of the worst presidents on record, being well known for the Watergate scandal and a not-so-graceful departure from politics…The economy on Nixon’s watch couldn’t hide his sins.   

In both cases, for the most part, the markets focused more on economic fundamentals and corporate earnings and not on the political fallout of impeachment proceedings.  So, will Trump dodge the same bullet that Clinton did?  Conceivably, he can because of the strength in the economy, the jobs picture, and record closes in the stock market.  However, if a few Republicans unexpectedly support impeachment and he’s actually removed from office, the markets might take pretty good hit.  Why?  Because Trump (love him or hate him) is a business-friendly president and also because the market’s EXPECTATION is that he serves his first term fully and runs again in 2020.  Expectations in capital markets are fragile and when uncertainty hits home, investors lose confidence which can escalate fear and cause a “snowball” effect of sell pressure on stocks – don’t forget about the “machines” either and remember the main input in a trading algorithm is momentum – on the downside AND on the upside!

At Capstone, we think the chances of impeachment passing are extremely slim and if expectations are met, the markets in the short run should be fine. 

Looking a bit further down the road though we ask, are there bumps?  What about that recession that investors were clamoring about in August when the notorious “yield curve inversion” occurred in the bond market?  Let’s look back…In my August 14thmessage to clients, I explained that the inversion was a very strong predictor of a recession and of problems for the stock market.  Statistically speaking, the last five inversions eventually led to economic recessions, on average recessions occur 22 months following the inversion, and the S&P 500 has gained, on average, 12% one year after a 2 to 10 inversion.  Since the inversion in August the S&P 500, 4 months later, is up around 9.50% and staging a photo finish for this year…If history were to repeat itself, we could see more upside in 2020 but let’s recall that this indicator tells us that recessions have historically hit 22 months later and typically, because the stock market is a discounting mechanism, it’s likely that stocks would sell-off prior to the actual recession taking hold.  Does that put us in any danger going into the end of 2020?  Could be, but then we all know it can’t be predicted. 

Market shocks and economic downturns don’t announce themselves.  They typically run us over and we never see them coming…This is why during bull markets, it is crucial to be on top on things in your portfolio and not to fall asleep at the wheel.  We never bring out the proverbial “coffee can” for our money, but we should be fine tuning our portfolios so that we can weather the next storm and make it successfully to the next new bull market.

Always remember that sooner or late markets will stall, recessions are just part of our investment lives, and, as always, we are investors for decades not days, weeks, or months.  Focus on the long-term and invest responsibly and you will have success.       

For any non-client of Capstone reading this post, if you’ve only been investing for a few years or within the last decade, you haven’t seen a FULL market cycle, or if you are a seasoned investor who hasn't made adjustments to “weather proof” your nest egg, call us for a free review.   We can be reached at (570) 587-7800 (office – direct) or 888-587-7526 (toll-free).  

 

(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.)