Watch Out For Scandal
More than Presidential Health, it’s a Scandal that markets abhor.
The clouds of Scandal are beginning to swirl around the Biden White House. For those who keep up with the latest news reports, suspicions are rising that the President and his son may have received illegal payments from countries as diverse as China and Ukraine. Two countries that are prominently featured in the news.
According to the latest opinion polls from the Pew Research Center, Biden’s approval rating has declined to a mere 35%, a level considered highly dangerous, especially for a President fighting off impeachment and seeking reelection.
For investors, this should raise a bright red flag because, as it turns out, there is one thing that the stock market abhors: A presidential Scandal. In modern Stock Market History, US Presidents have had little short-term effect on the Stock Market. Markets react to long-term trends, such as tax policies and regulations, far more than they respond to a particular president’s day-to-day activity.
You may assume that the health of a President would have a substantial impact on Stocks. But that is not that significant. Since the end of World War II, there have been four cases of health emergencies while a President was in office. By far, the most impactful was in 1956, when President Eisenhower suffered a severe heart attack. Markets reacted swiftly, with the Dow Jones Industrial Average falling nearly 7% that day. It was the one real blip in one of the longest-sustained bull markets in history, a bull market that lasted from the late 1940s until the mid-1960s.
In 1963 President Kennedy was assassinated. Although this was an extremely traumatic event for the nation, markets were able to mitigate any potential loss by closing early. Half an hour after the news broke that Kennedy had died, the exchanges shut down and remained closed over the weekend and the following Monday. By halting trading, exchange managers held the losses on the markets to less than 3%.
A 1965 Heart Attack for Lyndon Johnson, and a 1981 assassination attempt on Ronald Reagan, had virtually no effect on the Stock Market. Although I suspect in Reagan’s case, the markets had little reaction due to the management of the news reports rather than the event’s seriousness. At the time, the public was told that Reagan’s injury was minor and did not threaten the President’s life. Only many years later would we learn that his blood loss was substantial, and there was the real possibility that he might have perished.
But overall, the fact remains that health events, and even assassination in the case of President Kennedy, if adequately managed, do not generally have a significant adverse effect on financial markets.
The other major event affecting a President and the Stock Market is Scandal, and here the picture is much less clear. In the modern era, there have been two instances where a President has been impeached. Most recently was the twin impeachments of Donald Trump, in 2019 and again in 2021. These impeachments had absolutely no effect on the financial markets. In fact, during President Trump’s term in office, he received one of the best market performances in recent memory, with the market rising on average over 13% during Trump’s four years in office.
On the other hand, the Scandal surrounding the impeachment and resignation of President Richard Nixon seemed to be the door that opened the way to one of the most sustained and worst bear markets of our epoch. During the year that the Watergate Scandal first broke, markets began to tumble. That first year fell 15% but did not stop there; the bear market fell 45% over the next couple of years, with many small-cap stocks falling 75% and 80%. It was a devastating decline that wouldn’t see many stocks recover for eight long years.
Perhaps most remarkable was how closely those days resemble our own. It was a time of burgeoning Government Debt. Begun under Lyndon Johnson and his policies of “guns and butter.” Johnson asserted that we could fight the War in Viet Nam and support the most significant social spending until then, the Great Society. The Federal Deficit ballooned, necessitating raising taxes.
Nixon followed this with a dramatic increase in Federal Regulation. Nixon’s policies, for instance, led directly to the formation of the Environmental Protection Agency (EPA) and the Occupational Safety and Health Administration. Put both of these Presidents back to back, and you have a dramatic increase in deficits and regulations, a textbook example of how to slow an economy. Add in the removal of a President, and it looked to investors everywhere that we had a run-away, free-spending, regulation-choking government. It all resulted in one of the worst bear markets ever.
Could it all be happening again?
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