To Impeach or not Impeach... Full Analysis of Effects the Impeachment Process on Global Markets

September 12, 1998 05:06 GMT -- The long-awaited report from Independent Council Kenneth Starr is finally out, and the U.S. stock market didn't seem to care.

Late Friday afternoon during U.S. trading hours, the U.S. House of Representatives made the Starr report (this link will take you to another Web site) available to the public on the Internet. After a brief sell-off, traders in the U.S. stock market decided there were no real surprises in the report and the market surged to close up 180 Dow points. What, then, is implied by the market's reaction to this report during a week containing dire global economic news?

To answer that, let's examine a little history and a little of the present economic situation. The U.S. stock market began the week by soaring 5% on Tuesday, marking the 60th largest percentage gain in U.S. stock market history. The reason, ostensibly, was that the media was reporting that Fed Chairman Alan Greenspan had announced that the U.S. Federal Reserve Board "was just as likely to lower rates as it was to raise them" as of its last FOMC meeting on interest rates. In actuality, of course, the Fed moved from a "tightening bias" to a "neutral bias." The former is a precursor to a Fed-dictated rise in interest rates, the latter a neutral stance. An easing bias would be a precursor to a future easing of Fed-controlled interest rates if, in fact, the Fed decided that such action was warranted. At its last meeting, then, the Fed did not change interest rates but instead moved off its former tightening bias.

The rest of Greenspan's speech last Friday was a brilliant assessment of the esoteric economic causes of the 1990s boom and the recent global bust. He indicated, by the way, that despite the great technological advances of the 1990s, the marketplace is still motivated by human psychology that is no different from that of our forebears a century or more ago. This was right down our alley since Global Market Strategists, Inc., combines in its market approach a combination of fundamental, technical, and market psychology factors. The U.S. market, after the Greenspan speech, chose to hear the only glimmer of hope for the short-term: the Fed may finally ease monetary policy.

Then came the Starr report late Friday. The market, which had sold off when the report was first released, soared again when it was "determined" by traders that there were no surprises in the report. The market again had decided to focus on "good" news in a sea of bad news.

The significance of this optimistic attitude? First of all, the market has recently sold off more than it has in the past ten years, and is now in a better position to have discounted bad news after that decline. Secondly, bear market declines generate cash among institutions, and oversold conditions produce situations in which institutions can commit cash back into the market in stocks that have been reduced in price during the decline. And, thirdly, there are still plenty of bulls left after only seven weeks of decline who feel the market is not, in fact, in a bear market but, rather, in a bull market correction, and they are ready to buy if the market is not collapsing.

But what would a full-blown U.S. impeachment process mean for the markets? Unfortunately, history lacks much precedent since the only President to go through the impeachment process was Andrew Johnson in 1868. Then, the stock market did not react much at first, but sold off later in the process. President Nixon in 1974 went through only the very beginning stages of the impeachment process, then resigned. The market, which had already peaked in early 1973, plunged after that resignation in a devastating bear market. During the initial stages of the process, though, the market had attempted to hold up after having declined for much of 1973.

Thus, it is little wonder that the market did not collapse merely upon the presentation of an independent council report presenting to congress possible impeachable offenses by President Clinton. Rather, declines are likely later on if the impeachment process proves serious or if it drags out. This Starr report, by the way, is perceived by many as a report on a sex scandal. However, the actual charges by Independent Council Starr are not much different than those against President Nixon in 1974 and, in fact, are more numerous. President Nixon was charged with 3 impeachable offenses ranging from perjury to obstruction of justice to lying to the American people. Mr. Clinton is charged with exactly the same offenses, only there are 11 charges leveled by judge Starr versus Nixon's three. The U.S. Congress, then, has its work cut out for it.

Still, for investors, the real question is: what will this do to investment portfolios considering the recent global financial market collapse and economic crises of 1997/1998? The simple answer is that it certainly will not help. The U.S. has been considered a safe haven for global investors during the crises of the past year or so. Political instability could result in foreign flight capital out of the U.S. and into the European Economic Community. In 1995 during the Mexican crisis and the so-called Tequila Effect (resulting contagion effect throughout South America), flight capital made its way, in part, from Latin America to German short-term paper. With the German mark reaching new 1998 highs during the most recent global monetary crisis, this may, in fact, be happening again, although the contagion effect is worldwide instead of just Latin America-wide.

The more complex answer is, of course, not as simple as that which is expressed above. A drawn-out impeachment process will only add uncertainty in an already uncertain global environment. Impeachment, or even a scenario in which President Clinton remains in office as a very "dead duck" President stripped of power, would communicate a message to global investors that perhaps there are other choices besides the U.S. marketplace at a time when stability is of paramount importance. The impeachment process, which begins in the House of Representatives and would later be tried by the Senate, could stretch out until March of 1999, according to statements by some U.S. Congressmen. In this case, capital could make its way to Europe, or at least remain out of the U.S. market for longer than would otherwise be the case.

In any case, we have indicated for nearly a year in our research that the risk of owning stocks is extremely high during the last half of 1998, and that the "other shoe" would likely drop this year with respect to the mounting global crisis that has occurred the past 15 months. Adding political uncertainty and the possibility of the removal of a U.S. President would only serve to take away one positive factor that the U.S. normally contributes to the global economy: a stable government. In the least, Clinton's credibility is completely gone, and any actions he takes will be questioned and scrutinized. It is truly a sad state of affairs during this critical time of global economic turmoil.