The S&P is trading at all-time highs again. Break open the Champagne! Happy days are here again!
Markets are fully expecting a rate cut and could sell off sharply if they don’t get one.
But besides the trade war and a slowing global economy, the uncertainty surrounding the possible impeachment of President Trump will be a drag on markets through December.
It’s impossible to browse the web or watch TV without seeing or hearing about Democrat plans to impeach Trump. This has been a long time coming.
In fact I first warned my readers about this in February 2017 right after Trump was inaugurated. But now it’s here.
As things stand now, the House of Representatives is on track to vote on articles of impeachment by early December (see below for reasons why it’s not a sure thing).
If impeachment does go ahead, it may be too late in the legislative calendar by then to hold a trial in the Senate before the Christmas recess, so the trial may not be held until the Senate is back in session in late January.
Of course, the Senate would vote to acquit Trump unless a substantial number of Republican senators voted to convict. That’s extremely unlikely, barring some dramatic new development.
In some scenarios, the Senate could even vote to dismiss the charges without a trial on the grounds that the impeachment itself would be illegitimate since it did not allow due process of law to Trump. That has never happened in U.S. history.
The other three impeachment proceedings resulted in Senate acquittal (Andrew Johnson and Bill Clinton) or resignation before impeachment (Richard Nixon).
If it does come to that and the Senate votes to dismiss the charges, it would be as if the “impeachment” were not even an impeachment because it lacked the colour of law.
Regardless of the technical process, Trump would remain as president and would still be running for reelection in 2020 with an excellent chance of winning.
Is there a chance that the House will not even vote to impeach Trump?
That depends on the willingness of first-term Democrats in districts Trump won in 2016 to vote to impeach (again, see below for a detailed explanation).
Here the news is not so good for Trump. Polls are showing majority support for impeachment, including among independents (Democrats are overwhelmingly in favour just as Republicans are overwhelmingly opposed; the independents hold the balance of power).
Of course, these polls have many flaws, including oversampling Democrats and polling all voters instead of just registered voters.
But for now, public support is combining with momentum in the Democratic caucus to drive the impeachment train to its final destination.
On the flip side, new polls (good ones, not the junk kind) paint a more complicated picture.
They show that 59% of likely voters say the U.S. is on the “wrong track.” Yet Trump’s support among Democrats is actually growing.
The way to reconcile the seeming contradiction is to infer that voters believe Democrats will do an even worse job.
But overall, get ready for fireworks in December as Trump could become just the third president in U.S. history to be impeached.
Congress is gearing up for a new impeachment proceeding against President Trump. Normally, the first question in a case like this is, “Why is President Trump being impeached?” But this case is so confusing that we have to ask another question first…
“IS President Trump being impeached?”
If that question seems ridiculous — how could you not know if impeachment is even taking place? — it’s not. The exact status of the impeachment of President Trump is completely opaque.
There is no question that a large group of Democrats in the House of Representatives want to impeach Trump.
Right now, the House is composed of 234 Democrats, 197 Republicans, 1 independent and 3 vacancies. This means that the House Democrats have enough votes to impeach Trump without any support from Republicans. It would take only 218 out of 234 Democrats to impeach Trump; no Republican votes required.
The Democrats don’t need Republicans, but they do need each other and that’s where things get complicated.
Depending on the latest survey, approximately 175 Democrats are firmly in favour of impeachment. In the 2018 midterm elections, the Democrats captured 31 seats in districts that formerly voted for Trump. These and other gains flipped the Democratic caucus from a minority of 196 to a majority of 234.
The problem is that almost all of those 31 first-term Democrats are moderates in districts with a substantial number of Republican voters. Going along with impeachment could be political suicide.
If you remove those 31 votes from the 234 Democratic seats, you only have 203 potential votes for impeachment, which falls short of the 218 votes needed. Assuming no Republican support and further assuming no smoking-gun revelations about Trump, it appears that the Democrats simply do not have enough votes even in their own caucus to impeach Trump.
Still, the analysis doesn’t end there. There may be new revelations that hurt Trump as we saw with the allegations about conversations with the Ukrainian president about potential corruption investigations involving Trump’s rival candidate Joe Biden. That turns out to have been enough to sway more than a few of the moderate Democrats.
One should also not discount the effect of peer pressure. If 10 or so of the moderates come over to the impeachment side, the pressure on the remaining 21 will increase accordingly. There is safety in numbers. As more moderates move to the impeachment camp, the pressure on the holdouts becomes unbearable. They can fall back on an “everybody’s doing it” defence with their own constituents. A trickle can turn into a flood.
And one cannot underestimate the impact of political muscle. Organisations such as Need to Impeach funded by billionaire presidential candidate Tom Steyer have threatened to back progressive primary challenges to any Democrat who does not support impeachment of Trump.
It’s one thing to risk losing to a Republican in a general election. It’s another to be outflanked by your own party in a primary election.
That’s how Alexandria Ocasio-Cortez beat top-ranked Democrat Joe Crowley in a primary election in a safe Democratic district in New York in 2018. Crowley never saw AOC coming. Now he’s out of Congress. Freshmen moderate Democrats fear the same result at the hands of progressive billionaire-backed challengers. That may be enough to get them on the impeachment train.
In short, the sentiment of the House Democratic caucus is in a state of flux with enormous external pressure in play. The 31 additional Democratic votes needed to get to 218 may not be as far out of reach as it seems.
The headcount is not the only opaque facet of the impeachment puzzle. There is a serious question of whether impeachment is even happening or not.
If you ask House Speaker Nancy Pelosi, she is trying to have it both ways.
On Sept. 24, the speaker announced that the House is pursuing an “impeachment inquiry” through a number of committee investigations. Yet she stopped short of saying that formal “impeachment proceedings” had begun. That might seem like a small semantic difference, but it’s not.
The impeachment inquiry announced by Pelosi just announced is no different than the impeachment inquiry already announced by House Judiciary Committee Chair Jerry Nadler. It’s true that Pelosi’s leadership position gives her views more weight, but an impeachment inquiry is just an inquiry and not a process backed by a formal vote of the House or one leading to a formal vote on articles of impeachment.
Whatever your views of the speaker’s politics, all political observers agree that she is highly astute when it comes to the political process and what works and what doesn’t. She knows that an impeachment will only help Trump’s chances at reelection in November 2020.
Trump’s base will be enraged and Republican turnout in 2020 will be amplified. This could assure Trump victories in the critical swing states of Pennsylvania, Michigan, Ohio and Wisconsin, which Trump won in 2016. It could even tip new states to the Trump column including New Hampshire, New Mexico and Minnesota.
Even worse, moderate Democrats could lose House seats because their constituents from both parties disfavour impeachment. This could cost Democrats the control of the House and cost Pelosi her role as speaker of the House.
The speaker is playing for high stakes and wants to avoid impeachment at all costs unless Republicans switch sides and favour impeachment also. That’s highly unlikely.
Still, the Democrats who favour impeachment have their own political calculus. They come from safe districts and have no fear of losing to Republicans in a general election.
The bottom line is that there is much more uncertainty than certainty right now when it comes to impeachment.
Markets are more resilient than many observers believe. Markets can deal with good news and bad news. They can rally strongly based on good economic news and “animal spirits” and they can correct sharply when the economy turns down. Still, investors can survive both. You can even make money in bear markets if you can spot the few winners, short the losers and move to cash.
There is only one condition that markets do not handle well — uncertainty.
When uncertainty reigns, it’s impossible to know what comes next. You can’t position for a bear market because the uncertainty may disappear or be resolved uneventfully. You can’t position for a bull market because the uncertainty factor may grow worse and actually lead to a catastrophic outcome.
Here’s what will happen.
The House will proceed vigorously with impeachment whether they call it a “proceeding” or not. They will take testimony, produce witnesses, jump to conclusions and do everything possible to damage Trump. This will be a major headwind for stocks between now and December.
If impeachment results, the Senate will acquit Trump quickly in late January 2020. That could prove a catalyst for higher stock prices and even drive the stock market to new highs.
Impeachment will proceed and acquittal will definitely result if impeachment gets that far. The only uncertainty is whether articles of impeachment will actually be put to a vote by mid-December.
If impeachment is voted on, the relief rally will come on acquittal in late January. If impeachment is not voted on, the relief rally will come in mid-December. Either way, the impeachment train will run out of steam.
Bottom line: Stocks will be under pressure because of political uncertainty for the next two months. A relief rally will emerge in mid-December or late January. Investors who are nimble can profit from both moves.
The best shelter for investors in a high state of uncertainty is to increase allocations to gold, U.S. Treasuries and cash while reducing exposure to stocks.