Given the recent turmoil in Washington regarding the president’s possible impeachment, investors may wonder whether this turmoil could damage their investment portfolios. There is no easy answer to this question, but investors should take heart. More often than not, the markets are indifferent to the political events in Washington. The economy matters much more.
A case in point involves Bill Clinton’s impeachment in 1999. While there was turmoil in the markets in the last several months of 1998, it had nothing to do with the brewing Clinton-Lewinsky scandal. Instead, investors had to contend with the fact that Russia had defaulted on its sovereign bonds, Asian countries were experiencing a currency crisis, and a large U.S.-based hedge fund, Long Term Capital Management, had collapsed under the weight of extreme leverage. Financial and economic conditions, not political events, likely caused stress and drawdowns in the markets.
By 1999, even as impeachment proceedings gathered steam, the markets came roaring back. The exchange-traded fund for the Nasdaq 100 (QQQ) doubled in just that year. Market participants were much more interested in bidding up prices in the mania of the New Economy and the technological revolution than they were in selling because of political scandals.
By contrast, the economy was much weaker during the Watergate hearings in 1973-1974 where the U.S. stock market experienced one of its worst bear markets ever. This bear market carried with it not only much lower prices for equities, but also high inflation, causing about twice the pain. But again, it was more likely financial and economic forces that led to this bear market than Congress’ investigation of Nixon’s administration and Nixon’s subsequent resignation on the eve of his impeachment.
Currently, while economy is by no means trouble-free, it is much stronger than it was in 1973-1974, although not as strong as it was in 1998-1999. If the markets enter a bear market, it will almost certainly relate to financial and economic issues, and not to whether the President will be removed from office.
Regardless, as momentum investors and trend-followers know, you need only look at recent performance and average prices to see that the markets are not going down. While this could change, the prices will tell the tale, enabling investors to avoid the worst stages of a bear market, should one occur. If one does not occur, investors can ride the markets to new highs.