This column originally ran on Real Money Jan. 17, 2017 in the days prior to President Trump's inauguration. With the current obsession over whether or not the House of Representatives will actually move to impeachment and what it means for markets, I thought it might be a good idea to revisit the subject.
After having read it in our current climate I don't see that much is different. Some would say I was wrong and that one tweet has changed things. Sure it has, but the tweets were financial not political. I still think it behooves us to understand the difference between the two.
Over the Christmas holiday, I took a short trip to visit the presidential library of Bill Clinton in Little Rock, Ark. I like history and I think the U.S. presidential libraries can be interesting, often to put that period of time into context. After all, during the heat of the moment we often think, "This is the worst" or "This is the best" when in fact that is not usually the case; we can often find other points in time when things were worse or better.
I also recently saw the movie Jackie about how this former first lady handled herself in the aftermath of the assassination of President John Kennedy. These two experiences stuck in my head because they were clearly very "presidential" news for the U.S. Political news.
We often hear today that one of the market's risks is a "tweet from President-elect Trump." So I went back to research what the markets did during these two periods of presidential/political news, and since I was at it, I researched the Nixon years as well, since that was surely another "presidential moment."
I will begin by asking if you realize that for almost 14 months after Kennedy was assassinated, the U.S. had no vice president. Not even an acting one. Can you imagine the uproar we would see today if there was no VP for over a year? And yet, this is not ancient history; for many of us this occurred in our lifetime.
What I discovered in this exercise was that markets tend to care about financials more than they do politics. It's not that politics doesn't matter, but overall, it seemed to me that financial news moved the market much more.
Here's a chart of the Dow Jones Industrial Average (DJIA) from January 1963 to January 1965. I have noted on it the JFK assassination. I'm sure at the time it felt horrific, but the market was already moving down and within a week or so it had recovered all that it had lost. Now look at the other arrow on the chart -- that's when President Lyndon Johnson asked Congress for a massive tax cut in January. He signed it into law in late February. Score one for financial over political.
Just a side note, the DJIA was the more important index back then, which is why I will use it in this report for consistency's sake.
Now let's look at what transpired after we finally had a vice president in place. Box A on the chart is a curiosity to me as I can find very little news for why the market retreated over 10% in such a short period of time. Point B, though, arrived just after the Fed embarked on a tightening cycle. I call that a financial reason.
On the next chart, the green circle is point B from the previous chart, when the Fed embarked on a tightening cycle. Point A was when they ended that particular tightening cycle and began lowering rates. Point B, in 1967, was when LBJ asked for a tax boost to finance the Vietnam War. You might notice that the market wasn't very fond of that. Again, it's financial.
There are two green arrows on the chart in 1968. They represent the tragic assassinations of Martin Luther King Jr. (April) and Robert Kennedy (June). Talk about turbulent -- and political -- as Kennedy was running for president in 1968. My take on this: The market was already on its way down, and while the news may have exacerbated the move, it did not start the move.
And what of point C on the chart above? That was when the Fed stopped its tightening cycle. Please glance at the big red arrow in early 1969. That was quite a move down: about 5% in a week. The reason? On Feb. 26, the Fed restated it will tighten credit to cool the economy. Now let's look at the rest of 1969 and into 1970.
That Fed threat kept a lid on the market. The prime rate was rising during that period as well. But that big red arrow on the chart in late October 1969? Over the weekend, the Germans revalued their deutschemark. I call that financial and I call that a problem for stocks as you can see the DJIA was at 880 (already down 15% from the highs) on its way to 630, a very nasty 25% decline. Again, I see no political news to speak of in this time.
On the chart of 1971, below, Point A is the beginning of a hiking cycle by the Fed and B is the end. The red arrow is from something I saw in my research that notes at that point in time Treasury bills were at the lowest level in 10 years and they began rising from then on (as prices rise, yields fall). So here again, the market is responding to lower interest rates, not anything political in nature.
Most folks will know I am leading us up to the latter part of the Nixon years, when we had a president forced to resign for the first time. On the chart of 1972 to 1974, below, we see point A is the beginning of a tightening cycle and B is near the end. Yet the market doesn't respond to the end of the tightening cycle.
It turns out the Fed was just on hold. At Point C, it started hiking again. It did not stop until Point D in September 1974. What is curious is that Point B coincided with Vice President Agnew resigning; that is the slide you see. Aha! We finally found a political "reason" the market went down. But it was also in the midst of a tightening cycle, so it is possible it just exacerbated it.
Point D is also an interesting sidebar as that was when President Nixon resigned. The market was already down so far by that point. It did not start a decline and it likely hastened the very end of that leg down.
As we move on to the Clinton years, there is only one chart. In July 1997 (Point A on the chart below), Thailand revalued its baht (recall the effect the German revaluing of the deutschemark had on the markets in October 1969 -- nothing but down). This was the beginning of the Asian financial crisis.
Point B on the chart is when the first news reports circulated about President Clinton having an affair with a White House Intern. Does this look like the market cared? I'll say no. It cared more about the fallout from the Asian crisis, to my eyes.
Point C was the beginning of the whole LTCM (long term capital management) debacle. Again, this was financial (it was also the real fallout of Point A on the chart -- the beginning of the Asian financial crisis). Point D on the chart represents when the House of Representatives decided to begin impeachment proceedings against Clinton.
So here, in the late 1990s, we have a president in hot water and the markets don't react to that, but rather to the financial crisis. Oh I'm sure, in hindsight, someone will say, "But we knew they wouldn't take it to the Senate." Did we really? Or do we know it now?
So can one tweet change everything? I'll say probably not. Can a president in hot water in the middle of a Fed tightening cycle have an effect on the market? I'll say yes. But as someone who focuses on the indicators and statistics in the market, I would also say it probably also depends on where the indicators are at the time.
For more views on this topic, Real Money's Jim 'Rev Shark' DePorre and Doug Kass discuss the intersection of politics and the markets here: