The White House is currently embroiled in controversy on several fronts. And the unfolding debates surrounding the situations in Benghazi, the IRS and press wiretapping have escalated to the point that it has induced some to include the "-gate" suffix in their media conversations. The purpose of this article is not at all to debate whether the allegations associated with any of these situations have any merit or not, as such political debate is better suited for other forums found elsewhere outside of Seeking Alpha. Instead, the intent is to simply recognize the fact these debates are now taking place and to explore whether they present any meaningful risks to investment markets if they were to escalate to the levels that some are suggesting they could in the months ahead. Such risks are particularly worth evaluating given the importance of fiscal and monetary policy on the markets today.
In order to evaluate any potential future impact on financial markets, it is worthwhile to reflect back over recent history to past instances where controversy overtook the White House for a period of time. And the three most prominent episodes over the last forty years in this regard are Watergate during the Nixon administration, the Iran-Contra affair during the Reagan presidency and the Monica Lewinsky scandal during President Clinton's time in office.
The Watergate scandal came as a result of the failed burglary at the Democratic National Committee headquarters at the Watergate office complex and the subsequent cover up attempt by the Nixon administration that stretched over the next two years. Although the actual event took place on June 17, 1972 and the scandal plodded along in the coming months, it had no meaningful impact on the 1972 election, as President Nixon won reelection with one of the largest electoral vote victory margins in history. It was not until early the following year in February and March 1973 when formal investigations were initiated and the scandal began to gain notoriety. Over the course of the next 18 months, a steady stream of revelations emerged and the situation increasingly deteriorated. By August 8, 1974, President Nixon was effectively left with no other choice but to resign from the office.
Despite all of the turbulence and political uncertainty associated with the Watergate scandal, the associated impact on the U.S. stock market (SPY) was minimal to none. At first glance, it may appear otherwise. After all, the S&P 500 Index declined by -28% from the time when U.S. Senate first approved the select committee to investigate Watergate on February 7, 1973 to the date when Nixon resigned on August 8, 1974. But it is important to remember that a variety of other downside pressures were weighing on the markets at the time. Not only was the global economy still adjusting to the Nixon Shock and the termination of the Bretton Woods agreement in 1971, but it was also plunging into a recession by 1973 at the same time that inflation began rising rapidly due in part to the OPEC oil embargo. In fact, when reflecting on all of the major events that transpired during the Watergate scandal from the Watergate hearings to the "Saturday Night Massacre" to the release of Nixon's transcripts to the release of the Smoking Gun tape to Nixon's resignation, the stock market reacted with a collective shrug in each and every instance. However, when Saudi Arabia and the other Arab oil producing nations announced that they were joining together to embargo oil exports to the United States in mid October 1973, markets reacted both immediately and violently, falling by over -16% in little over a month.
Thus, during what was arguably the most notorious political scandal in the last half century, investment markets were largely unmoved, as it was other fundamental factors driving its decline.
The Iran-Contra scandal emerged in November 1986 amid allegations that the United States had assisted in the sale of arms to Iran in order to secure the release of hostages and provide funding support to the Nicaraguan Contras opposing the Sandinista government. Both the sale of arms to Iran and the funding of Nicaraguan Contras were prohibited. The controversy first came to light on November 3, 1986 following a leak to the Lebanese media that revealed the arrangement. Only a few weeks later, the story had fully spread to the American press. By November 25, President Reagan had announced the creation of the Tower Commission to investigate the matter. The commission released their report on February 26, 1987 and President Reagan took to the Oval Office on March 4, 1987 to address the nation, which effectively drew to a close to further exploration of his involvement in any meaningful way.
The impact on financial markets from the revelations associated with this episode was once again little to none. Although stocks initially traded sideways when the revelations first surfaced, price performance could be best described as generally placid with any brief declines being so modest that they could just as easily be attributed to daily market gyrations. And once the calendar flipped into 1987, the stock market took off like a shot to the upside. By the time Reagan was addressing the American public in early March, the stock market had actually rallied by +17%.
Thus, although the Iran-Contra affair was far more modest in size and scope relative to Watergate, it had no measurable negative impact whatsoever on financial markets.
The Lewinsky scandal first surfaced in mid January 1998 on reports that President Clinton had entered into a sexual relationship with then 22-year old White House intern Monica Lewinsky from November 1995 to March 1997. Although the president initially denied the affair, the scandal escalated in July 1998 following Lewinsky's grand jury testimony and submission of indisputable DNA evidence that the relationship had occurred. President Clinton subsequently admitted to the relationship in August 1998 and was charged with perjury and obstruction of justice for which Congress later impeached him on December 19, 1998. He was later acquitted on both counts on February 12, 1999.
Just like the past two episodes, the U.S. stock market was completely unfazed by the Monica Lewinsky scandal. Overall, it rallied by +28% on the S&P 500 from the time when the story first broke in January 1998 to the president's acquittal in February 1999. It is worth noting that the stock market did enter into a sharp -22% correction along the way from mid July to early October 1998. And this pullback does coincide with the timing of Lewinsky's testimony and the president's subsequent admission. But these events had little if anything to do with why stocks were correcting at the time. Instead, the pullback was being driven first by the Russian Ruble Crisis on August 17, 1998 where the government defaulted on its debt and then the near collapse and rescue of mega hedge fund Long-Term Capital Management (LTCM) over the following weeks. Once the LTCM bailout was completed, market confidence was quickly restored and the full fledged inflation of the tech bubble soon followed.
Once again, although it was a political controversy significant enough that it led to the impeachment of the President for only the second time in history, investment markets simply did not take notice.
The current controversies facing the White House may soon fall away. Then again, they may continue to escalate. But regardless of how they unfold from here, history suggests that despite any associated uncertainty, the impact on financial markets in general and the stock market in particular is likely to be minimal to none. Thus, while it is likely to continue to occupy the political news landscape, it is not a risk factor that requires any meaningful consideration from an investment perspective.
This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.