Would Impeaching Trump Really Cause The Stock Market To Crash?

Wondering how the market might react to Trump's impeachment? So were we.  (Photo: ANDREW CABALLERO-REYNOLDS via Getty Images)

President Donald Trump tweeted last month in response to House Speaker Nancy Pelosi’s announcement of an official impeachment inquiry that the stock market would crash if he were booted from the White House. 

Clearly, there’s a lot to unpack here. But it does raise the question: How might the stock market react if Trump actually were impeached?

To find out, we spoke with financial planners about stock market behavior during previous presidents’ impeachments and what we might expect today. 

Johnson, Nixon, Clinton: Past Impeachments And The Effect On Stocks

When Andrew Johnson was impeached in 1868, the stock market didn’t exist as it does today. Stocks were mostly made up of banks and railroad companies, according to Forbes, and only an elite group of investors was allowed to trade them. The Dow Jones Industrial Average wouldn’t be established until 16 years later. So, looking at how the market behaved at the time of Johnson’s impeachment wouldn’t present an accurate comparison for modern times.

The next president to undergo impeachment proceedings was Richard Nixon. His impeachment inquiry was announced on Oct. 30, 1973, in response to his involvement in the Watergate scandal. Over the next month, the S&P 500 fell 11%. It tumbled 33.4% over the following year. 

“On the surface, this suggests the impeachment had a major impact on stocks, but there were other major factors that had far more relevance for businesses and their stock prices,” said Jonathan Bird, a certified financial planner and owner of Farnam Financial. 

He noted that the Arab oil embargo began that same October, which drove up oil and gas prices. Inflation had also been out of control, and the government was raising rates to double-digits in order to reverse it. The Bretton Woods international currency exchange system fell apart, and that November, one of the country’s worst recessions began. “In other words, Nixon’s impeachment at the time was the least of our concerns,” Bird said. Nixon resigned from office in August 1974 before he could be impeached, which was considered to be almost certain.

We saw the opposite market reaction during President Bill Clinton’s impeachment proceedings, which began in 1998. He was impeached by the House, but the Senate acquitted him in 1999, allowing him to finish out his term. 

In the months preceding the release of independent counsel Kenneth Starr’s report to the House on Clinton, the S&P 500 fell 19.4%. However, it took off soon after. “During this period, we experienced a rising U.S. stock market,” said David Barson, a certified financial planner and president of Barson Financial Planning. In fact, stocks were up an impressive 28% during the period between the start of impeachment proceedings and the Senate’s acquittal. 

“Turns out, the investigation and House inquiries came during one of the best bull markets in history,” he said, noting that the U.S. fell back into a bear market over a year later. “Economists again attribute that bear market and the following recession to other factors, namely over-valued technology companies and internet stocks.” 

Ignore The Headlines

So what might we expect if Trump is impeached? Probably not a whole lot, according to Ric Edelman, a financial advisor, author, syndicated radio host and co-founder of Edelman Financial Engines.

He said the stock market has so far ignored the impeachment conversation for two reasons ― the same two reasons as during Bill Clinton’s presidency. “First, there’s an awful lot going on in the world that has nothing to do with the political environment in Washington,” he said. Edelman explained that Wall Street is predominantly concerned with corporate profits and the economy. “And both of those are doing very well. We’re in the longest bull market in American history, corporate profits are an all-time high, unemployment is at a 50-year low, inflation is very low, interest rates are very low and they’re going lower, according to the Fed.” 

So, in the face of all of this great economic news, there is no reason to believe that this impeachment proceeding is going to matter much. Not to mention, if Trump is impeached and it goes to a trial in the Senate, that’s going to take quite a while to happen ― likely well into the second quarter of 2020, according to Edelman. “That’s only six months before the next election, during which the president may be defeated anyway. Some are arguing this may simply serve as the acceleration of the fall election results.” Some estimate that the process could take even longer.

For all these reasons, he said, investors should not consider the impeachment inquiry in their investment decisions. “When you focus on the daily headlines, which change constantly ... you can be swayed radically in your outlook,” Edelman said. “You can get very excited when you hear good news and very upset when you hear bad news. And that could cause you to buy and sell at the wrong time for the wrong reasons.”

Instead, investors should do what financial experts have always advised, regardless of the headlines: Invest according to your risk tolerance, regularly review your asset allocation to be sure it still matches your goals and maintain an emergency fund just in case the unexpected does happen.

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Myth 1: You should stay away from credit ― period.

Truth: Some financial experts, like Dave Ramsey, say you should never take on debt. The thought is that too many people struggle with debt and the risk of borrowing money simply isn’t worth it. But in today’s credit-centric world, avoiding credit cards or other types of debt makes accomplishing other financial goals incredibly difficult.

Those who avoid using credit are at risk of never developing a strong credit history, according to Eszylfie Taylor, president of Taylor Insurance and Financial Services in Pasadena, California. “This may present challenges when a consumer looks to make larger purchases like a car or home, as they have not exhibited the ability to borrow money and repay debts,” Taylor said.

But even if you don’t plan on borrowing money for a major purchase, you can still run into trouble when renting an apartment, opening a new utility account or even getting a job if you don’t have an established credit history.

You don’t have to put yourself in debt to build good credit. But you do need to have some skin in the game.“The simple truth is that consumers should look to establish multiple lines of credit and make payments consistently to build up their credit scores,” said Taylor.

Myth 2: Closing credit cards will raise your credit score.

Truth: If you paid off a credit card and don’t plan on using it again, closing the account can feel like the responsible thing to do. Unfortunately, by closing it, you can inadvertently harm your credit score.

According to Roslyn Lash, a financial counselor and the author of The 7 Fruits of Budgeting, this has to do with your credit utilization ratio. This ratio represents how much of your total available credit you’re actually using ― the lower your utilization, the better your score.

If you close a credit card, your available credit immediately drops.“If you have less credit but the same amount of debt, it could actually hurt your score,” Lash explained. In most cases, it’s better to cut up the card but keep the account open. Setting up account alerts can help you keep tabs on any activity or fraudulent charges.

Myth 3: Checking your own credit hurts your score.

Truth: Certain types of credit checks can have a temporary negative effect on your credit score ― but checking your own credit is not one of them.

Checking your own credit results in a “soft” inquiry, which doesn’t affect your score, according to Adrian Nazari, CEO and founder of free credit score site Credit Sesame. Other types of soft inquiries include when you’re pre-approved for a credit card in the mail or a prospective employer runs a credit check as part of the hiring process.

You can check your credit score as often as you want with no consequence. In fact, you should check it regularly; a sudden dip could indicate a problem or possible fraud.

Sites such as Credit Sesame and Credit Karma allow you to see your VantageScore 3.0 for free, though you should know this is usually not the score that lenders review. The most widely used score is your FICO score. And though there are services that charge a monthly fee to gain access to your FICO, you can often see it for free if you have a credit card with a major issuer such as Chase.

Myth 4: Making more money will increase your score.

Truth: When you apply for a credit card or loan, the lender will often consider your income when deciding whether or not you’re approved. But that factor is independent of your credit score, which they’ll also consider.

It seems to make sense that the more you earn, the easier it should be for you to pay your debts, but “your income has nothing to do with your score,” Lash said. So feel free to celebrate that next raise, but know that your credit score will remain the same.

Myth 5: Credit reports and scores are the same things.

Truth: Though it represents the same types of information, your credit report is not the same as your credit score.Think of a credit report as your financial report card and your credit score as the overall grade.

“Your credit report is a record of your credit accounts … [including] your identifying information, a list of your credit accounts, any collection accounts you have, public records like bankruptcies and liens and any inquiries that have been made into your credit,” said Nazari.

On the other hand, your credit score is a three-digit number that represents how likely you are to repay your debts based on the information contained in the report. Your score is “based on a complex algorithm that evaluates your relationship with credit over time,” explained Nazari. “Your credit score is not included on your credit report.”

Myth 6: Once delinquent accounts are paid off, your slate is wiped clean.

Truth: Paying off past due accounts will get the debt collectors off your back. But when it comes to your credit, the damage can last years after you’ve made good.

“Your credit report shows positive and negative accounts, including collection accounts, discharges, late payments and bankruptcies ― some of which can be on your report for up to 10 years,” explained Nazari.“That said, some collection agencies openly advertise that they will stop reporting a collection account once it’s paid off,” he added.

If that’s the case, keep an eye on your credit reports to make sure the delinquent account is removed. In most cases, however, you’ll have to live with the mark until it expires. Fortunately, its impact on your credit score should decrease with time, depending on the type of debt.

Myth 7: You can max out your cards as long as you pay the balance every month.

Truth: Paying your bill in full every month is the key to avoiding interest and building a solid payment history. But who knew that racking up a balance midmonth could hurt you?

That’s because the date that credit card issuers report your balance to the credit bureaus is often not the same date as your payment due date.

“For a better credit score, keep your balance under 30 percent of your card’s total limit,” recommended Nazari. So if your card has a limit of $1,000, you should avoid carrying a balance of more than $300 at any time.

However, if you want to be able to use more of your available credit, you can pay down your balance before it gets reported to the bureaus. Usually, said Nazari, it’s the same as the statement closing date, but you should check with your card issuer to be sure.

Myth 8: You need a credit repair company to fix your bad credit.

Truth: Poor credit can feel like an emergency, especially if it’s preventing you from borrowing money you need. Credit repair companies bank on that sense of urgency, literally. And though there are a lot of shady credit repair agencies out there, the truth is that even the legitimate ones rarely do anything for you that you can’t do yourself.

“The good news is that one’s credit is ever changing and can be repaired if there have been some missteps in the past,” Taylor said. “In time, issues from the past will pass and credit can be restored ... no matter how bad it is today.”

This article originally appeared on HuffPost.