Financial History 134 (Summer 2020) | Page 28

PAUL J. RICHARDS Presidential Impeachment and US Stock Markets By Peter C. Earle A broad array of academic studies find a connection between political stability and economic growth. It’s intuitive: as the setters and overseers of the “rules of the game,” elected and appointed government officials have a direct impact upon fiscal, monetary and regulatory policy. If those policies are consistent over time and thus predictable, firms can budget and plan— which in turn sets the stage for economic growth. Compared with other nations, the United States has had a consistent record of political stability, with a few brief exceptions: the American Civil War, in particular. (Even during the War of 1812, during a foreign invasion, political rule remained essentially intact.) The United States has also experienced little unforeseen presidential turnover, with a single resignation and a few assassinations. One might argue that presidential impeachments are the closest the United States ever comes to true political uncertainty. This article examines the stock market effects of presidential impeachment Members of the House Judiciary Committee discuss articles of impeachment against US President Bill Clinton on Capitol Hill in Washington, DC, December 11, 1998. proceedings. We likely need not ask whether impeachment proceedings affect the financial markets; rather, we seek to determine how impeachments affect the financial markets. But rather than jump directly to the three historical episodes (Andrew Johnson, Bill Clinton and Donald Trump), we will first examine market reactions to three proposed elements of impeachment concerns individually, and then compare them to what equity markets actually did during and after the three impeachments. The three elements are: general uncertainty; concern about the succession of key persons; and worries specifically associated with the removal of a US President (outside of elections). Our equity market benchmarks will be US equity indices: usually the Dow Jones Industrial Average, but occasionally others. But first, a few caveats. First, no market moves in response to a single cause; for that reason, one cannot attribute the entirety of a move in prices, or the lack of a move, to one specific event. Second, one is well advised not to use the price fluctuations of stock indices, at least not alone, to draw major sociological conclusions. And finally, over the period under examination (from 1868 to 2020) the size and complexity of stock markets increased tremendously. The longer the time period between events, the less relevant comparisons between them tend to be. I: General Uncertainty The prospect of an impeachment creates great uncertainty, and uncertainty is the bane of financial markets. Because the United States is the largest economy in the world, the issuer of the world’s reserve currency and at the center of a massive network of global trading relationships, an injection of sizable uncertainty spells concern for not only Americans but foreign governments, as well as global investors of all stripes. As a first step, I examine the impact of a series of unexpected events upon the US equity markets. Few would be surprised to hear that financial markets are notably averse to sudden increases in unpredictability. The average decline among these events shall serve as an initial, if incomplete, benchmark (see Table 1). II: Unexpected Removal of Key Officials To consider the financial impact of the removal of a high-level decision maker, consider this element of impeachment by analogy: how do stock prices react when key personnel leave a company unexpectedly? CEOs According to CNBC anchor Jim Cramer, unexpected resignations are a major red flag for investors: “When you see 26 FINANCIAL HISTORY | Summer 2020 | www.MoAF.org