Political Risk and the Markets
We have been making the case that the U.S. economy is doing just fine and the equity market is not overvalued by conventional metrics. This week it was announced that the U.S. economy grew at an annualized pace of 1.9%, above what most economist thought. On the market side, the S&P 500 is trading at 16.7x next year’s earnings; the 25-year average is 16.22x[i]. We have positive growth in the economy and the markets are healthy, therefore we don’t think a recession is likely in the near term.
However, we do see geopolitical risk as a possible headwind that could put a stop to this bull market. In the U.S. we have elections in 2020 and more uncertainty developed as The House of Representatives, approved on Thursday, a resolution to formalize the procedures of the impeachment inquiry into President Donald Trump. The markets closed down on Thursday, giving up some of the gains from Wednesday, when the Federal Reserve decided to lower interest rates to 1.50-1.75% as expected.
To help us understand how political risk could affect the markets, The Surevest Investment Committee decided to analyze how the S&P 500 reacted when the House approved an impeachment inquiry on President Clinton.
The following timeline was provided by Time[ii]:
Oct. 5: The House judiciary committee votes along party lines to recommend an impeachment inquiry
Dec. 11: The House Judiciary committee votes to recommend impeachment
Dec. 19: The House of Representatives votes to impeach President Clinton on two of the four articles of impeachment
Feb. 12, 1999: The Senate finishes the impeachment trial, acquitting Clinton on both charges
From the time the House voted to recommend an impeachment inquiry to the time the Senate acquitted Clinton, the S&P 500 did not decline. In fact, it rallied 29.5% total return during that period. One year later, the market had not given up the gains and was up 30.4% total return.
That’s not to say that we expect the same thing to happen again, but it helps to look at what history has taught us. Although political and geopolitical risk could hinder market growth, it is not certain that it will result in a recession. We continue to look at the data and we have been saying all year, the U.S. market still has legs.