Global equity prices have moved moderately and irregularly lower over the past two weeks. A paucity of new developments on the trade front and continued slow growth in Europe and China have created an economic news vacuum. In the US, there is plenty of news as a new chapter of political turmoil supplants economic concerns, at least for the moment.
Bond prices have been generally rising since mid-September but remain well below the highs reached in July and August. The Federal Reserve’s ¼% cut in its Fed Funds rate on September 19th was widely expected and had little discernible follow-on impact on the markets. The Treasury yield curve remains inverted at the two and five year note points, however, the degree of the inversion has diminished in the aftermath of the Fed’s rate cut.
Broad US equity indexes broke out of their late Summer trading range early in September but stopped short of new highs. Several indexes advanced to within less than 1% of their most recent peaks, registered in late July, but failed to punch through to new record levels. The chart below illustrates the past two years’ price movements of the DJTMI.
Within the past week, a new political development in the US has captured investors’ attention. A “whistleblower” complaint was filed with the Intelligence Community Inspector General in late August, alleging that President Trump has engaged in corrupt activity with the newly elected President of Ukraine, Mr. Zelensky. The document focuses on a late July call between the two leaders and alleges that Mr. Trump had pressed Ukraine’s President to gather political “dirt” on Mr. Joe Biden, possibly the 2020 Democrat Presidential nominee.
On its face, this appears little different from the myriad insider leaks from the Administration that have plagued it since taking office. However, House Democrats have seized on allegations in the complaint to initiate a “formal Impeachment inquiry,” seeking the President’s indictment and ultimately trial in the Senate. A guilty verdict by 2/3 of the Senate would remove Mr. Trump from office and elevate Vice President Pence to the Presidency.
There are issues that can potentially undermine the Democrats’ scenario. The complaint asserts Mr. Trump requested that Mr. Zelensky assist in gathering what amounts to opposition research for the President’s 2020 reelection campaign. The request was characterized as “pressure.” However, based on contemporaneous notes taken by persons privy to the call that were released as a “transcript,” the request was actually for assistance determining the origins of foreign interference in the 2016 election. No request for assistance with next year’s election is evident in the notes. Additionally, Mr. Zelensky has stated that he felt no pressure exerted by President Trump.
As of this writing, no vote by the House of Representatives to authorize an impeachment inquiry has occurred, which is a requirement of long-standing House rules governing impeachment procedures. Without an affirmative vote triggering the process, Republican members are unable to subpoena witnesses and gain additional powers typically exercised only by the Majority party, which is a key component of a formal impeachment investigation. Speaker Pelosi has chosen to simply proclaim that an impeachment process has been initiated, which raises the question of whether Democrats are merely trying to hamstring the Administration with hearings and subpoenas without going on record to commence a “legal” impeachment investigation.
Markets have seemingly been only mildly affected by this political drama, albeit negatively. The prospect of removing a sitting President amid a robust economic expansion with just over a year until the next election is somewhat puzzling timing. If Democrats truly believe Mr. Trump is guilty of corruption and collusion, they have chosen a circuitous route to convince the public. We are now faced with a series of hearings that cannot lead anywhere without a vote by the full House to authorize the process.
To date, the evidence against the President propelling House Democrats is based on secondhand reports of a confidential conversation between two world leaders. Within the last month, regulations surrounding whistleblower procedures within the Intelligence Community were modified to allow hearsay evidence to form the sole basis of a complaint of this nature. Prior to that revision, the minimum standard had been that the complainant must have had direct knowledge of the transgression they revealed.
House Democrats are apparently going “all in” on this gambit. They are raising questions about the President’s character and condemning conduct detailed in the complaint, which remains unsupported by corroborating firsthand knowledge. What this means for the country, and investors, is that little if anything in the way of legislative action from Congress should be expected until after the November 2020 election. All current Democrat Presidential candidates have called for the President’s impeachment, which leaves a yawning gap between aspirational discussions about their visions for the country and the reality being pursued by their House colleagues.
Current events in Washington are taking on the look of a partisan circus, derailing any resolution of pressing issues facing the country. Markets are watching and investors are paying close attention. So far, in the wake of last week’s revelations, investors perceive little significant threat to economic conditions.
Those of a certain age will recall the crushing bear market that accompanied the Watergate scandal and the Impeachment of Richard Nixon. When Bill Clinton’s travails reached a similar stage, however, markets took little notice as a decade long boom was underway, spurred by emergence of the Internet as a revolutionary consumer and business tool.
The point of this brief recap of past impeachments is that politics may exert short term influence on markets, but it is the state of the economy and expectations for the future that propel prices higher or lower. Mr. Nixon’s impeachment was accompanied by a steady increase in inflation and an economic contraction. Mr. Clinton’s was during an expansion fueled by historic gains in worker productivity and investor wealth.
We can’t know what future days will bring on the political front. At this juncture, markets appear relatively sanguine about the possibility of a severe economic dislocation resulting from House actions. The US Constitution has served the country well for more than 230 years by providing a framework for the peaceful transition of power and clear delineation of the duties, responsibilities and powers of each branch of the government. We expect it will provide clear boundaries for upcoming events.
Many elected Democrats appear determined to remove Mr. Trump from office at any cost. The President is equally adamant that he has committed no acts that justify his removal. The bottom line is that until and unless Speaker Pelosi and her members vote to begin an Article I impeachment process under existing House rules, we are witnessing little more than posturing and theater. For the process to have teeth, a vote must be taken that will give both parties equal ability to build a case for or against impeachment. Stay tuned.