With a statement lasting only a few minutes, House Speaker Nancy Pelosi unleashed an impeachment inquiry that has the potential to move the price of everything from soybeans to stocks, bonds and the U.S. dollar.
The only problem? Figuring out in which direction all those prices will move. Traders will have their work cut out for them when assessing the impact of this new effort to dethrone an unpredictable leader who has influenced markets like no other U.S. president before him — and who already has survived several mortal threats to his presidency.
Despite a newly released memo recounting a phone call in which President Donald J. Trump asked his Ukrainian counterpart to investigate Democratic rival Joe Biden, what lies ahead in politics — and markets — is far from certain.
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“You can’t trade this stuff right now, it’s impossible,” said Michael Purves, CEO at Tallbacken Capital Advisors. “There’s so many different scenarios. Does this support Biden? Does it hurt Biden? Does this support [Elizabeth] Warren? Ultimately if her momentum keeps building, what happens to Trump? If impeachment goes through, is it ever going to become a reality with the Senate being Republican-controlled? There’s so many different scenarios, you almost have to just ignore it and keep just investing the way you would.”
While this may be sound advice, ignoring this soap opera is not an option for many on Wall Street, especially as the crucial fourth quarter approaches. Investors and analysts have been busy cranking out trade ideas to profit from the latest and most dramatic act in the drama that has been Mr. Trump’s presidency.
(More: Trump tariffs have wiped out most families’ tax-cut gains)
Still about trade
Perhaps the biggest question is how the impeachment drive will affect Mr. Trump’s trade war with China. Stocks and bond yields reached their highs of the day on Wednesday after Mr. Trump said a trade deal could happen sooner than people think. On Tuesday, the president’s stern words about China in a speech at the United Nations and reports that Ms. Pelosi was considering impeachment triggered a sell-off in stocks and gains in bonds.
“The reaction yesterday was investors putting themselves in the shoes of Chinese negotiators and saying ‘If I’m sitting across the table and I’m one of the Chinese negotiators, my position, relatively speaking, just got a lot stronger,’” said Shawn Cruz, manager of trader strategy at TD Ameritrade.
There is little consensus on how the political ramifications play out, especially when it comes to the trade war. Still, many analysts and investors agree on a few things. For one, while the House of Representatives could vote to impeach Mr. Trump, the Republican-led Senate is unlikely to remove him from office since it would take 67 votes — including at least 20 of the Republican senators — to do so.
In the meantime, other initiatives in Washington — say, the U.S.-Mexico-Canada trade pact or proposals to reduce prescription drug prices — could get stalled until it all plays out. If Bill Clinton’s impeachment is any guide, this could be a months-long process.
At RBC Capital Markets, analyst Brian Abrahams wrote that an overhaul of drug prices is unlikely now, and that may give a boost to biotechnology companies that have largely sat out this year’s rally in stocks.
“Legislating is dead,” Raymond James policy analyst Ed Mills wrote in a note.
“Downright scary”
Meanwhile, at Wells Fargo Securities, interest-rate strategists Mike Schumacher and Zachary Griffiths see the process keeping a lid on Treasury yields as investors digest elevated political risk.
They say the “animus in Washington could prove downright scary” because Congress will be unlikely to agree on a spending bill to boost the economy if a downturn emerges in the next six to 12 months. But sentiment could just as well flip, sending yields higher, if the House impeaches Mr. Trump and he’s then acquitted, they added.
That’s what happened in Mr. Clinton’s case, with the House voting in October 1998 to initiate an inquiry into allegations that stemmed from a sexual harassment lawsuit. The Senate then acquitted Mr. Clinton of two charges on Feb. 12, 1999, after falling well short of a two-thirds majority. Stocks rallied through most of that period.
Still, events like this are rare and past market action cannot be relied upon as a playbook because of the unique context that accompanied each, according to John Normand, JPMorgan’s head of cross-asset fundamental strategy. Equity and credit markets entered the Clinton impeachment drama while recovering from the Asian financial crisis, Russia’s default and the collapse of Long-Term Capital Management, Mr. Normand wrote in a note to clients. Meanwhile, dot-com stocks were booming.
In the six months before President Richard Nixon resigned amid the Watergate scandal, Mr. Normand noted, the S&P 500 slumped, 10-year Treasury yields rose 120 basis points, gold rallied and the dollar weakened. But this was a period when the Bretton Woods system of fixed exchange rates was disintegrating and an oil shock delivered both recession and rising inflation.
Complacency risk
Meanwhile, the push to impeach Trump is beginning while global growth is slowing, market valuations are high and “classic late-cycle vulnerabilities” such as slowing profit growth and rising wage costs are building.
“It would be complacent to think that the impeachment process just adds another ring to the circus,” Mr. Normand wrote.
Ms. Pelosi’s decision to launch a formal inquiry came after a string of lawmakers from politically vulnerable House districts backed impeachment for the first time. A key question is whether House Democrats will remain unified under a process that Ms. Pelosi says will be led by the Judiciary Committee but will involve five other panels and could extend beyond the Ukraine allegations into other areas.
Senate Republicans have largely defended Trump despite an array of controversies since he came to power and Majority Leader Mitch McConnell took to the Senate floor Wednesday to mock the House impeachment inquiry.
“We know that House Democrats have been indulging their impeachment obsession for nearly three years now,” Mr. McConnell said, calling it a “never-ending impeachment parade in search of a rationale.”
It’s the never-ending parade of uncertainties that are hard to quantify, let alone figure out how to trade, that some on Wall Street are seeking to avoid.
“We have gotten several questions about why we have not made any investment recommendations over the past few weeks,” Jeff Saut, strategist with Saut Strategy and Capital Wealth Planning, wrote in a note. “To that we reply — we only make recommendations when we think the odds of success are high — we have not felt that way for the past few weeks.”
