investing

Will White House Scandals Derail the Stock Market?

Forget parallels to Watergate. The economy is in much better shape today.

Investors are wondering if the stock market’s Trump bump could morph into the Trump slump as questions continue to swirl around the White House regarding its Russia connections. It’s a high-stakes concern. Since President Trump’s election in November, stocks have risen 14% on high hopes for the president’s pro-business agenda, which includes corporate tax cuts and regulatory rollbacks. But policy has been overshadowed by probes in Congress and in the Justice Department.

In mid May, investors got an inkling of the havoc a White House–related bombshell can wreak. The Dow Jones industrial average plunged nearly 400 points following reports that Trump had urged FBI director James Comey (whom Trump later fired) to shut down an investigation of his former national security adviser, and a special counsel was named to oversee the investigation into Russian ties to Trump’s campaign.

Although the market recovered quickly, investors worry that the clouds hovering above the White House could drift over to Wall Street. Many recall the Watergate scandal that forced Richard Nixon from office, and the brutal bear market of that era that lopped 48% off stock prices. Standard & Poor’s 500-stock index plunged 26% between the Saturday Night Massacre on October 20, 1973, when Nixon fired the special Watergate prosecutor, and the president’s resignation in August 1974.

But extrapolating Watergate-era markets from Trump’s current travails is a mistake. “Comparing today with 1974 is not apples to apples, or even oranges to tangerines. It’s apples to, I don’t know, snow cones,” says Sam Stovall, chief investment strategist at research firm CFRA. The Nixon years were marked by “stagflation,” with the economy contracting at a 3.8% annualized rate in the third quarter of 1974, when the president resigned, and inflation running at 11%. Unemployment was rising, as were oil prices, thanks to an embargo that led to soaring gas prices, rationing and long lines at the pump.

By contrast, today’s economy grew at a 1.2% annual rate in the first quarter and should notch growth of more than 2% for 2017. Inflation is a moderate 2.2%. Unemployment is at the lowest rate in a decade, and gas prices are stable—there’s more concern about an energy glut than about shortages. “The White House may dominate headlines, but it’s financial stability that affects bottom lines,” says Stovall.

Which is why, if investors insist on reexamining White House history in relation to Wall Street, Bill Clinton’s impeachment in 1998 may be a more apt comparison. Stocks were on the upswing in 1998, even as rumors of an affair with a White House intern were published and denied. The market peaked in mid July, then fell 19% through August as an emerging-markets currency crisis rocked global markets. Stocks turned as the House began an impeachment inquiry, and by the time the president was impeached in December, the market had rebounded roughly 25%. Despite the 19% decline, the S&P gained 27% that year.

Credit the resilience to a growing economy, low inflation and an unemployment rate below 5%—similar to today. S&P 500 companies emerged from an earnings slowdown in the first quarter of 1999, similar to the turnaround companies experienced in the third quarter of 2016. So it’s not really surprising that despite the political angst of Clinton’s second term, the market was in the midst of the longest bull market ever. Today, we’re in the second-longest—and counting.

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