The market has largely shrugged off the headlines around the impeachment investigation of President Donald Trump’s involvement with Ukraine. Many investors think it’s unlikely the president will be convicted by the Senate and removed from office. That doesn’t mean they should tune out the political saga happening in Washington, D.C. The developments could affect the outcome of the 2020 election and bring new risks to the U.S. equity market.
Impeachment—for the few times it has happened—hasn’t been a major market...
Photograph by Alex Edelman/Bloomberg
The market has largely shrugged off the headlines around the impeachment investigation of President Donald Trump’s involvement with Ukraine. Many investors think it’s unlikely the president will be convicted by the Senate and removed from office.
That doesn’t mean they should tune out the political saga happening in Washington, D.C. The developments could affect the outcome of the 2020 election and bring new risks to the U.S. equity market.
Impeachment—for the few times it has happened—hasn’t been a major market driver. The S&P 500 lost 13% during Richard Nixon’s impeachment proceedings in 1974, and gained 28% during Bill Clinton’s in 1998. The economic situation during those years made the main difference, leaving the impact of the impeachment itself almost negligible.
But one thing is very different this time, wrote RBC Capital Markets strategist Lori Calvasina in a Monday note. Both Nixon’s resignation and Clinton’s impeachment happened during their second term, while Trump is in his first term and will face a showdown with Democrats in the election.
The Ukraine controversy is already damaging Trump’s reputation. As more details emerge, his chances at the ballot could be hurt further next year, leaving a Democratic win for the White House more likely. This would make things look especially risky for investors, given that Sen. Elizabeth Warren from Massachusetts—viewed by many as the least market friendly candidate—has recently risen above former vice-president Joe Biden to lead the polls for the Democratic nomination.
The Iowa caucus takes place on Feb. 3 and roughly two thirds of the Democratic delegates will be assigned by the end of March. If Warren wins the nomination, the pain associated with a Democratic White House could occur well ahead of the election day, Calvasina says. The combination of a Warren White House and Democratic Congress would be particularly challenging for stocks.
In RBC’s September investor survey, health care was identified as the primary sector at risk—due to the ongoing battle against high drug prices—if Democrats sweep both the White House and Congress in 2020. Financial, energy, industrial, communication services, and consumer discretionary companies are also at risk, noted Calvasina, since they’ve benefited the most from lower corporate taxes and historical levels of share buybacks—two main issues under criticism by many Democrats including Warren.
There is also a significant degree of risk for tech stocks due to the push to break up the Big Tech such as Facebook (ticker: FB) and Google (GOOG) out of antitrust concerns. “The sheer multitude of [Warren’s] plans leaves U.S. equity investors with few safe havens,” wrote Calvasina.
Still, there are ways to play the election of progressive Democrats like Warren, says Calvasina. Environmental, social and corporate governance (ESG) investing—already increasing in popularity as investors pay more attention to issues like climate change and equal pay—will likely benefit from supportive policies.
If buybacks run out of favor politically, dividends will likely become a more popular way to return cash to shareholders, leaving some of the deeply undervalued major dividend payers a good bet. Utilities and REITs seem a safe place to go.
Small caps might also stage a comeback as they’ll likely see less direct policy risk than their large-cap peers. In the technology industry, for example, the break-up of Big Tech might be positive for other internet companies and retailers that have been struggling under the dominance of the so-called FAANG group.
Investors should expect a close election race and short-term uncertainty in policy expectations, which is historically associated with a volatile stock market. But looking beyond the election, the stock market tends to go up over time regardless of the political situation, says Calvasina, even when Democrats control the White House and both chambers of Congress. That means any pain from a potential Warren win will eventually fade as businesses and investors adapt to new political leaders.
Write to Evie Liu at evie.liu@barrons.com