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What a Trump Impeachment would mean for financial markets
This week US President, Donald Trump, made the bold statement that if he were impeached a lot of people would be poorer because the markets would crash. Is this a fact or just a scare-tactic by the President?
Analysts have reviewed market performance during past impeachments and most have concluded that there appears to be no obvious pattern. Presidential impeachments have been associated with weaker, stronger and indifferent asset market performance. What they deduced is that how an impeachment will affect market performance is more linked to expectations of policy change resulting from an impeachment and whether that policy change is viewed positively or negatively.
If there is a perception that a government’s policies are damaging the economy, the possibility of a change in government would actually boost asset performance. An example of this is the impeachment of former Brazilian president Dilma Rousseff.
The events leading to her downfall actually began in 2014 with an investigation into money laundering which ultimately unearthed corruption at the highest levels of Brazilian business and politics, involving oil giant Petrobras and members of the major political parties. In spite of the growing scandal President Rousseff was re-elected in October 2014.
Following a series of revelations and arrests of prominent politicians and businessmen, March 2015 saw protests demanding the impeachment of Rousseff. By the time the request for impeachment was filed later in August, the President had reached a 71% disapproval rating.
Investors welcomed the prospect of Rousseff’s removal because it promised a move away from left wing populism and the policy paralysis of much of her second term. Vice-President Temer, who ultimately replaced Rousseff was viewed to be a much more market friendly option with promises to fix the damage done to Brazil’s fiscal and economic position.
Brazilian equities and the country’s currency largely benefitted from the impeachment process, showing modest outperformance versus emerging markets as the probability of impeachment grew. As it became apparent that the lower house would vote to impeach, Brazilian outperformance became more pronounced.
However, where a government is seen as benefitting the economy, or at least doing no harm, the prospect of change in government can induce market jitters and trigger volatility. The case of the impeachment of President Clinton is felt to be an example of this, especially considering the market rally that followed his acquittal. Of course, this can be as much due to the removal of uncertainty as a seal of approval on government policy, given that markets never like uncertainty.
Investors who are concerned about how to trade given the impeachment talks that continue to hover around President Trump should first seek to determine how likely is the success of such an attempt? Secondly, they should research whether Trump’s policies, particularly those that affect the economy are viewed positively or negatively. And what is the likely direction of policy if an impeachment attempt is successful?
Most importantly, investors should always remember that the risk to their portfolio is how they react to market volatility and not the volatility itself. So stay focused on your personal goals and shorten duration and ensure adequate levels of diversification. And of course, for the more aggressive investors out there, don’t forget that volatility can create exciting trading opportunities!
Sticking to these simple guidelines can provide clarity when one might otherwise drown in market noise.
Toni-Ann Neita-Elliott is the AVP, Personal Financial Planning at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: email@example.com
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