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Impeachment Lessons?

04/05/2017

The conventional wisdom about the impact of impeachment on the stock market is that it will be temporary.  After all, the stock market rose 226% during the presidency of Bill Clinton.  My experience tells me the market will sink . . . until it is clear that the President will not be removed from office, as it is impossible to get a two-thirds majority.

Fortunately or unfortunately, history offers us little guidance.  The impeachment of Andrew Johnson occurred before a “real” stock market existed.  The Dow Jones Industrial Average did not even exist.  Also, it happened very quickly, which is very different from today.  The market, such as it was, actually rose 10% in the three months prior to impeachment but fell slightly during impeachment, before rising another 6% in the two months after the impeachment trial.

The impeachment of Richard Nixon accompanied a much more volatile stock market.  It started with a 10% loss in the first month of 1973, increasing to an 18% loss by August, when a two-month rally raised stock prices 15% — only 6% below its record high.  Then, the market did nothing until Nixon’s resignation in August of 1974, when the bottom fell out.  Stocks lost 27% in just two months.  However, in November, the market shot up 16%, before turning around the next month and hitting the bottom, down 45% from the peak.  Five months later, stocks were up an astounding 48%!  Whew!!

The Johnson impeachment tells us nothing.  The Nixon impeachment tells us that “nervous” investors should sit on a large cash position.  The Clinton impeachment tells us NOT to be nervous and just wait for it to pass.

Before “nervous” investors begin selling stocks, they would be wise to establish a trigger that will tell them when to start buying their way back into the market.

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