How impeachment uncertainty could affect US policy and markets
As talk of impeachment continues in the US, we assess the chances of this happening, the outlook for President Trump’s policy agenda, and the potential impact on markets.
The impeachment process
Impeachment is very much a political, rather than legal, process. Governed by the constitution, the bar is set rather low: “the President…shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanours”. In particular, the term “misdemeanours” gives considerable leeway.
A smoking gun – clear evidence of wrongdoing by President Trump – would likely be needed to turn the Republican Congress against the president. In our view this is the only scenario where we might see impeachment proceedings commenced by the Republican House before the midterm elections, or where Republican senators would back a Democrat-led impeachment effort.
The president’s low approval ratings do not bode well for the midterms. These elections nearly always involve losses for the incumbent president, with low approval ratings translating into significant losses. We see a risk that the midterms return a Democrat-controlled lower house which would drastically raise the odds of impeachment articles being brought against the president.
Could legislation be derailed?
As for what this means for policy, our base case at this point would be that both healthcare and tax reforms are achieved before the midterm elections, though the probability has fallen. However, reforms could be derailed if the White House is incontrovertibly tainted by illegal activity.
For the market, the impact would depend on expectations of policy change resulting from an impeachment. If we reach the midterms with no reforms enacted, it is unlikely the markets will take it well.
Barring a break with historical norms, control of the House looks set to pass to the Democrats, ending any hope of implementing President Trump’s agenda. At this point, markets could come to see impeachment as desirable because it would bring an end to uncertainty, with reforms off the table either way.
Overall, the best case scenario for markets would be one in which President Trump is cleared of all suspicion by the special investigation, removing impeachment risk and emboldening Republicans to push ahead with the reform agenda.
By contrast, the worst case would be that concerns over impeachment dog the administration throughout the remainder of President Trump’s term, preventing reform but never proving substantive enough to impeach Trump and replace him with Pence, who might have some limited chance of pursuing some limited programmes.
Last month's article on "The impact of presidential impeachments on markets" is available here, and the longer PDF version is available below.