William D. Johnston

Chairman

Economic Commentary

The connection between “Wall Street” and “Main Street” is always up for debate, as is the seemingly different focus between those inside the beltway and those who reside, live and work outside of the beltway. Media is driven by advertising revenue, which is highly correlated to viewership and subscription, whether that media be electronic, digital, or print. Those that follow media revenue trends tell us that presidential election cycles are good for media revenue results; thus, media is always hyper-focused on whatever is happening inside the beltway, especially during presidential election cycles.

Recently, I have had several clients ask if GDP and financial markets suffer during impeachment procedures. Our country has endured, through this writing, three impeachment proceedings: one of which resulted in a president being removed from office, and one resulted in a presidential resignation, and thus, the data sample is small. The impact of the economy and financial markets cannot be assessed by focusing only in the context of impeachment. As the Nixon impeachment process progressed, it became clear that the Nixon administration would not survive. The market began its descent in November after the infamous “Saturday Night Massacre,” and continued through the August 9, 1974 resignation. Some of the 48% decline in the S&P 500 was due to the impeachment process and resulting resignation; however, the single largest contributor was the oil embargo by OPEC countries that contributed to the CPI index rising to 11.4% in 1974, which essentially stalled the postwar economic expansion in the US.

The impeachment of President Clinton saw remarkably different results. First, and perhaps most important from an economic standpoint, was that the dot-com economy was exploding in the summer of 1998 and roaring in January of 1999. In February of 1999, the Senate voted not to remove President Clinton from office, which was the second most important difference of that impeachment history. In both cases, the equity markets suffered initially. In Nixon’s case, the declines continued, not due to impeachment, but rather recession and hyperinflation. In Clinton’s case, the markets stumbled and then soared. The growth in markets in 1998 and through 2000 was not due to President Clinton prevailing, but instead due to the explosion of the dot-com economic expansion.

The current impeachment that consumes the media and most of the oxygen within the beltway is not yet a process, but, is at this writing, moving towards one. Some reminders might be helpful as we examine the implications for the economy and financial markets. Impeachment is by its very nature a political, rather than a judicial process. There is not a judge that is present in a courtroom, but rather a committee chair and committee of congressional officeholders in the House, and a similar structure in the Senate. The House begins the process with a motion to begin the impeachment process and ultimately, after many months of hearings and testimonies from those subpoenaed, is responsible for voting up or down to remove the president from office and forwarding that vote result to the Senate which is then responsible to affirm the House’s vote or acquit the president, thereby nullifying the vote of the House.

Andrew Johnson was impeached for attempting as President to vacate the results of the Civil War and protect and preserve slavery after the emancipation and freedom of those held in slavery. President Nixon’s downfall was his overt cover-up of criminal actions of his administration and witness tampering that was revealed through the infamous Watergate tapes.

President Clinton’s near brush with office removal was simply that he lied to Congress about his affair with a White House intern while serving as president. Public opinion, which is very important to legislators, was hugely important in both of the most recent cases. Nixon’s party support began to erode as the infamous tapes surfaced. Clinton survived in large part due to a backlash of opinion by democrats as well as enough republicans who felt the affair, while appalling, was not in itself enough to terminate his presidency. This was a great disappointment to Newt Gingrich who led the Clinton impeachment fight, but in the end, he could count votes as well as anyone and knew that the Senate would vote to acquit. There remain many political observers today who feel that Newt Gingrich should never have let the matter come to a vote as doing so revealed many in his own party were not in lockstep with him.

Our current political theatre is different in so many ways, and yet very familiar in the political sense. “High Crimes and Misdemeanors,” as described by the founders of our constitution, is purposefully vague as a standard of impeachment and therefore political in its very nature.

If President Trump is not your “guy” so to speak, then calling a leader of a foreign country and asking that leader to investigate a political opponent of yours sounds, feels and acts like a crime as described by the Federal Election Commission. If the President is your “guy” then you simply don’t care, or feel that the potential collusion was limited and not worthy of impeachment. In both cases, the lens is political and not factual, and truth will be the victim on both sides of the argument.

Expectations during the next year should be tamped down in many areas. History demonstrates that most of the oxygen in the political room will be devoted to prosecution and defense of the impeached. Trade negotiations, geopolitical tensions, legislation, tax, health care, and immigration all will take a back seat to the political matters at hand. Within six months, the presidential election of 2020 will be in full swing. The Democrats will have landed on a front-runner by that time, and President Trump is in campaign mode constantly.

The real question with respect to financial markets and the economy is not the impeachment nor political process. As we described in the Nixon and Clinton impeachment proceedings, economic forces drove financial markets and recession results. It is very likely that the results will be very much the same this time around. We are long in the tooth with respect to our current economic expansion. Our manufacturing sectors are in recession, and consumer confidence is eroding. Employment remains strong as does wage growth, and inflation is muted. Consumers continue to shoulder our 2% rate of GDP growth, and our public policy of tariffs and trade war retaliation has bashed our manufacturing sectors. Supply chains are being interrupted, costs have escalated and forecasting suffers, thereby slowing and impeding business investment.

Solid employment data and consistent consumer spending indicate we are not yet in recession. We have often cautioned, however, that slow growth economies are vulnerable to geopolitical and domestic political actions. It is my sense that our vulnerability has been enhanced in recent weeks.