U.S. investors prepare for drawn-out House impeachment proceedings

September 26, 2019 2:00 PM EDT

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By David Randall

NEW YORK (Reuters) - Investors are starting to prepare for a long U.S. impeachment process that could drag into 2020.

The decision by the House of Representatives to begin impeachment inquiries that could end in a vote to remove President Donald Trump from office added more uncertainty to a stock market that is already struggling under the weight of issues ranging from the U.S.-China trade war to Federal Reserve monetary policy.[nL2N26F0ID]

Investors expect impeachment efforts ultimately to fail, given the unlikelihood that a supermajority of the Republican-controlled Senate votes to remove President Trump from office. However, they still see numerous ways the proceedings could spill over into financial markets.

With only two impeachment proceedings in the modern era to draw from, market history offers few guides. Here are some scenarios that Wall Street envisions:


The most likely scenario investors see is that impeachment proceedings do not progress beyond the House of Representatives and become a sideshow to other issues.

With a bear market remaining bearish during the impeachment proceedings against President Richard Nixon in 1974 and the bull market remaining bullish during the impeachment trial of President Bill Clinton from late 1998 to early 1999, "This very small unscientific sample set appears to indicate that the economy and markets are likely to pursue a path they would have taken anyway," said Michael O'Rourke, chief market strategist at JonesTrading.

That was certainly the reaction to the investigation by Special Counsel Robert Mueller of Russia's role in the 2016 U.S. election campaign, which did not significantly affect markets.

Investors are more focused on the direction of the Federal Reserve, which helped spark the nearly 20% rally in the S&P 500 this year when it began lowering interest rates due to concerns about sluggish global economic growth amid the trade war.

"It's impossible to take a guess on impeachment because it's too hard to handicap. The real driver of markets will continue to be the global economic growth backdrop and the earnings environment," said Emily Roland, co-chief investment strategist at John Hancock Investment Management.


Some investors however, figure there could be an indirect impact from the House impeachment proceedings.

Some analysts say they see the progressive wing of the Democratic Party becoming stronger, making it more likely that Senator Elizabeth Warren is the party's presidential nominee. Should she - or Senator Bernie Sanders - be elected with a Democratic-controlled Congress, either likely would enact policies that would weigh on the financial and healthcare sectors.

Warren's and Sanders' proposals to raise taxes on the wealthy, impose stricter regulations on the financial sector and provide healthcare coverage to everyone based on the federal Medicare program for Americans 65 and older have led some investors to expect a steep market reversal should it appear either one could win the presidency in November of 2020.

"There's unquestionably a shift to the left in this country," hedge fund billionaire Leon Cooperman of Omega Advisors said at the Delivering Alpha conference presented by CNBC and Institutional Investor. He joked: "They won't open the stock market if Elizabeth Warren is the next president."

Meanwhile, the specter of impeachment proceedings would make it less likely that moderate Democrats would vote for any Republican bills, likely stalling any trade deals or potential stimulus plans, said Peter Cecchini, global chief market strategist at Cantor Fitzgerald.

Another possible effect is that the trade war is prolonged as China feels less pressure to make a deal.

"It is hard to imagine the Chinese not taking a wait-and-see attitude, with little progress getting made," said Art Hogan, chief market strategist at National Securities. "This is a market that has been driven consistently this year by the tone around trade. That tone likely just took a hit."


This is the long-shot scenario that is not seen as likely by most investors.

Yet should it become apparent that President Trump could become the first president to be forcibly removed from office, the stock market will likely become much more volatile as the impeachment proceedings move from the House to a full trial in the Senate.

Any indications that Senate Republicans are becoming more willing to convict Trump would make bonds and other safe-haven asset classes more attractive as investors await clarity on the government before making large bets, said Masanari Takada, macro and quant strategist at Nomura.

(Reporting by David Randall; editing by Megan Davies and Dan Grebler)

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