How Impeachment Could Hurt the Stock Market

The possible impeachment of President Donald Trump, according to conventional Wall Street wisdom, is a non-event for the market, which cares more about economics. But suppose, over the long term, the market’s reaction isn’t so blasé after all.

What if Trump’s entanglement in a Washington political battle thwarts resolution of the US-China trade war? There’s little doubt that the trade conflict is harming the US domestic economy. Manufacturing in the US has slumped, which many ascribe to the dispute, along with a world economy that is also slowing. And the American workforce isn’t growing as fast, with job gains coming in below expectations.

The market seems almost hardwired to trade developments. When Trump announced that a deal with Beijing was imminent, stocks climbed. When he did an about face and slammed the Chinese with new tariffs, they slid.

Stocks dipped Sept. 24 when House Speaker Nancy Pelosi opened the impeachment inquiry, then rebounded the next day, only to fall some more—mainly due to bad economic news.

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Impeachment could harm investor sentiment if it scotches the chances for a trade agreement or leads to worsened tensions. If Beijing believes Trump has been harmed politically from the scandal around his call to the Ukraine’s leader about digging up dirt on Democratic presidential aspirant Joe Biden, then it may perceive no need to negotiate over the trade war.

“How much will China be willing to negotiate if they see a weakened president?” asked Art Hogan, chief market strategist at National Securities Corp. in a CNN interview. Chris Krueger, managing director at the Cowen Washington Research Group, told the network that the impeachment struggle could be a distraction for Trump that hinders any trade talks.

The two modern object lessons on stocks during impeachment come from the travails of Richard Nixon, over the Watergate scandal, and Bill Clinton’s lying about his relationship with a White House intern,.

For Nixon, from the beginning of the House impeachment inquiry in October 1973 to his resignation in June 1974, the S&P 500 fell 26%. In Clinton’s case, from the inquiry’s start to his acquittal in the Senate, the index rose 28%.

The difference, as many astute observers have noted, is that the economy was going to hell when Nixon was under scrutiny, but it was booming amid Clinton’s dire straits.

The economy will be at the heart of the 2020 election campaign. Democrats argue that the current buoyant economy (which is showing a few cracks), is propelled by the 2017 tax cut, a sugar-high that is now wearing off. Republicans say the economy should remain fine because Trump’s tax and regulation reductions will continue to boost it.

Should the economy sour anew, with China as the cause, stocks surely won’t do well.

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Tags: China, Donald Trump, Stock Market, Trade War, Wall Street

Ray Dalio claimed on Tuesday that China is “for the most part quietly winning the geopolitical war.” He added that populist uprisings may lead to damaged markets, hampering America’s ability to ward off Chinese competition.

Dalio, Chief Investment Officer and co-founder of Bridgewater Investments, the world’s largest hedge fund, wrote in a LinkedIn post noting that there are parallels between the current era and the late 1930s and early 1940s when the US limited Japan’s participation in the US economy. In addition to an oil embargo that triggered World War II and pushed Japan to attack Pearl Harbor. Previously, Dalio called the trade war with China a “tragedy.”

“Time is on China’s side, as it is improving at a faster rate than the US,” Dalio wrote. He added that countries are having to choose between the US or China, with more opting to align with China because of its outsized trade presence and capital inflows. While the US military is superior, China’s abilities are rising, especially in the cyber realm, he said.

The numbers back up Dalio’s claim. The more Trump amps up the trade war, the more the U.S. economy suffers. Companies and consumers are paying more for everything from steel to socks. New York Federal Reserve economist Mary Amiti recently co-authored a study in May issued by the Centre for Economic Policy Research that found U.S. domestic prices rose “one-to-one with tariffs levied that year,” as Chinese exporters did not lower prices. Moreover, American supply chains suffered and there were fewer imported varieties of goods available.

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Dalio predicted any impending economic downturn would be “socially and political ugly.” Such a scenario, he wrote, would require large fiscal spending and large budget deficits, with increased taxes on companies, more printed money of central banks and the buying of debts. Dalio predicted that as investors try to escape these constraints, it is possible that policymakers will turn to capital controls.

The economy has the largest wealth and political gaps since the late 1930s, Dalio noted. These, are leading to populist conflicts on the left and right that could undermine the efficiency of the economy and the federal government. Dalio sees this as a weakness for the US, predicting that the 2020 election will be “the greatest ideological clash” in our lifetimes, leading to tax law changes and wealth redistributions that will move markets.

Dalio echoed reports that the White House is considering ways to decouple the world’s two largest economies. He cited Senator Marco Rubio’s Equitable Act, legislation that ensures a process for delisting a Chinese firm from US exchanges if it doesn’t comply with US accounting rules and oversight regulations for three years. Citing national security concerns, China has been hesitant to let Big Four accounting firms inspect its companies. Bloomberg News reported on Friday that a U.S. Treasury Department spokesperson said there are no plans to block Chinese companies from listing on U.S. exchanges “at this time.”

Measures to limit China’s influence on US funds may be in the works. Dalio noted industry concerns over US capital enabling Chinese firms when the lines between state-owned and private firms are eroding.

Industry watchers Dalio’s plan calls for Trump to limit capital in China, and includes freezing payments on debts owed to China. As well as using sanctions to inhibit non-US financial transactions with China. Dalio added that the president can apply capital and foreign exchange controls, freeze assets or payments on assets and force divestitures to “deal with any unusual and extraordinary threat” through emergency powers.