Impeachment, USMCA, Global Trade War Truce and What It Means for the Markets
As we now enter the second or third phase of impeachment, the markets continue their historic rise. The Dow, S&P 500 and Nasdaq indices hit record highs. Breaking upwards, the Hang Seng Hong Kong Index rose 3%. The markets barely blinked as the House of Representatives Judiciary Committee voted on ominous Friday the 13th (predictably) along party lines in approving the two articles of impeachment against President Trump. The articles were approved by the House shortly before the holidays, but have not gone to the Senate for a trial.
The impeachment articles charge the President of the United States of committing “high crimes or misdemeanors” by “abusing the power” of office in connection with his Ukraine dealings and committing “obstruction of Congress” by allegedly refusing to comply with subpoenas and document requests from the House Intelligence Committee which lorded over the first phase of the “impeachment inquiry”. The impeachment proceedings have been going on for months and the case against the president has already been laid out before the trial has even started. But by all major polls and indications, it appears that public views and opinions across party lines have changed little, and in fact support for impeachment amongst moderates and swing voters is actually declining.
The President, meanwhile, has doubled down on his strategy that he will be exonerated in the Senate, which overseas the impeachment trial and is controlled by a Republican majority. Removing the President will require a 2/3 majority vote, which seems unattainable at the moment. The Republicans and Democrats are firmly split down party lines on whether to vote for impeachment, and a sizeable defection of some 20 or so Republicans Senators would be required to impeach President Trump. The recent victory for Boris Johnson and the Conservative Party in the UK suggests that a factious left leaning party, such as Labor, or the Social Democrats in the U.S. (Warren and Sanders) are alienating moderate voters who seem to be more interested in the economy rather than divisive social politics.
So far the markets have shrugged off the impeachment and history tells us that impeachment is less of a factor on the markets than prevailing economic conditions. Richard Nixon’s impeachment inquiry was announced on Oct. 30, 1973, in response to his involvement in the Watergate scandal. Over the next month, the S&P 500 fell 11%. It tumbled 33.4% over the following year. However, that same month the Arab oil embargo began, which drove up oil and gas prices and inflation had also been out of control, with the government raising interest rates to double-digits in order to reverse it. The Bretton Woods international currency exchange system fell apart, and that November, one of the country’s worst recessions began.
The Clinton impeachment proceedings had a nearly opposite effect on the markets. In the months preceding the release of independent counsel Kenneth Starr’s report to the House on Clinton, the S&P 500 fell 19.4%. However, following the investigation and well into the impeachment vote, stocks were up an impressive 28% during the period between the start of impeachment proceedings and the Senate’s acquittal. The dot.com bull market then continued well into the last term of the Clinton presidency before the bubble burst in 2000.
Recent market trends and a growing S&P 500 hitting record highs, seems to suggest that market watchers are increasingly betting that Trump will stay in office. According to one statistical study, as many of 80% of investors believe Trump will stay in office as the bull market continues.
President Trump seems to be taking a cue from history and is staying focused on the economy and trade deals. While facing the greatest existential crisis of his office, he has managed to get the USMCA passed with bipartisan support, resided over a growing economy and historically low 3.5% unemployment rate. His administration has pressed the Chinese to the negotiating table with the trade war, using the threat of tariffs and sanctions to lobby for stricter intellectual property protections for American companies, stopping forced technology transfer, and opening up the Chinese markets to more American goods and services. In return, the U.S. promises to forego tariffing another $160 billion dollars in goods, which includes the critical consumer items (including the i-Phone 11) in time for Christmas shopping.
In tweets, President Trump added that the White House would leave 25% tariffs on $250 billion in imports in place while cutting existing duties on another $120 billion in products to 7.5%. China will also buy more agricultural exports from American farmers who have been badly hurt by the tariffs as they have patiently supported Trump and waited out the trade war. In all, the U.S. expects a $200 billion boost in exports to China over two years as a result of the deal. “We expect the trade deficit to go down for sure,” Lighthizer said, adding that the deal will likely be signed the first week in January and take effect 30 days later. “Everything is written,” he said. “Everything is completely finished.”
The effects of the USMCA, or United States, Mexico and Canada Trade Agreement are less certain. This agreement is more of an update to NAFTA which essentially reduced or eliminated tariffs to trade between the three North American countries. Other than possibly increasing dairy exports to Canada, the main provision of the USMCA appears to be to clarify the point of origin rules for automakers, requiring 75% of parts to be produced in North America (in order to be free of tariffs) and a minimum autoworker wage of $16/hour. It is anticipated that this would make it easier for U.S. automakers to keep more auto jobs in the U.S., although that remains to be seen, as the U.S. auto industry, except for Tesla, has been on the decline for decades.
However, in general the reduced trade tensions across the Atlantic and in North America should be good for the economy, especially for international trade and companies that have manufacturing and substantial cross border operations and sales. To this end, global suppliers such as semiconductor companies, American retail and consumer companies with manufacturing abroad, computer and electronic manufacturers, smart-phone suppliers and cyclicals should continue to rise. As tensions thaw between the two largest economies in the world (U.S. and China) the global economy, including Germany, France, UK and Russia should also benefit. Therefore, for now, even with all the impeachment hysteria, it appears the market will focus on fundamental economic factors rather than political gamesmanship.