After a Trump Impeachment, Expect the Market to Bounce

(Bloomberg Opinion) -- President Donald Trump's comment Thursday morning that the stock market would crash if he's impeached has the causality backward: Without a stock market crash, it's unlikely he'll ever be successfully impeached. Only after or in the middle of a crash would the political environment change enough to get Republicans to abandon him and impeach him.

But if this scenario were to unfold, an actual impeachment would probably end up being a bullish development, not a bearish one. For evidence look to the slow end of the Nixon administration.

In January 1973, the month of the beginning of President Richard Nixon's second term, the S&P 500 was at a record high and Nixon's net approval rating was near its highest level as well. This was seven months after the Watergate break-in. Unfortunately for the president, core inflation was about to surge, which ultimately led to the unraveling of his presidency.

Also in January 1973, consumer price inflation excluding the volatile food and energy components rose 2.5 percent on a year-over-year basis. Then it really took off. By the end of 1973 it had risen at a rate of 4.7 percent. The S&P 500 fell more than 17 percent that year. Nixon's approval rating, which was in the upper 60s at the start of the year, fell to around 30 percent.

The next year was worse. By the summer of 1974, consumer price inflation had increased 8 percent over the past year. As of the end of July, 1974, the S&P 500 had fallen almost an additional 19 percent year to date. By that time, Nixon's approval ratings had fallen to the mid-20s. He resigned the office of the presidency on Aug. 9, 1974.

While the stock market continued falling for another eight weeks after his resignation, that ended up being a generational bottom. Never again have stock prices fallen so low. Core inflation peaked in February 1975, ending the recession of 1974-75, giving markets and the economy a reprieve.

Economies, markets and presidential administrations don't repeat over time, but a possible Trump impeachment would probably play out in a similar fashion. With a relatively strong economy and booming markets, his overall approval rating has been steady in the low 40s, with Republicans largely sticking with him. As long as the economy and markets stay strong, that's unlikely to change, no matter what comes out of the Mueller investigation or anything else involving his administration. But if the economy and markets do turn down, well … that's when Trump's luck runs out.

Only after a significant weakening would Republicans potentially abandon him. And only then would conditions be ripe for impeachment. (Unless the Democrats claim a majority in the House this fall. Then the action could begin without waiting for Republican disenchantment.)

And if Trump is kicked out of office, expect the stock market to bounce – not crash. By the point in an economic downturn when Republicans are ready to abandon him, we'd probably be closer to the trough of that downturn than to its beginning peak.

So it's not necessarily that removing Trump from office and replacing him with Vice President Mike Pence would directly lead to a strong economic environment. It's just that the impeachment would reflect an aging downturn, and the period after the impeachment would overlap significantly with the inevitable recovery. Naturally, that won't stop Trump's successor from claiming credit.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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