Impeachment saga: Smoking gun or nothingburger?
Bottom Line Stocks have been whipped around this week, with significant swings in volatility and investor sentiment due to the uncertainty surrounding President Trump’s phone call with Ukraine President Volodymyr Zelensky on July 25. An unnamed CIA agent assigned to the White House filed a whistleblower’s complaint, and on Tuesday House Speaker Nancy Pelosi announced a formal Trump impeachment inquiry. This prompted Trump to release an unredacted transcript of the conversation. While the situation is fluid and likely will evolve in the coming days and weeks, here is what we know now and our view of the potential economic, political and financial-market implications.
Political theater In our view, the chances of Trump actually being removed from office are negligible. Progressive Democrats in Congress and their far-left base have been impatiently searching for justification to impeach him since his election. To that end, Speaker Nancy Pelosi’s move appears to be nothing more than political theater—red meat to energize the Democratic base.
The Democratic-controlled House certainly has the votes (235-198) to impeach Trump, but all that means is this political hot potato will then be passed over to the Senate, which will hold a trial and ultimately reach a decision on whether or not to remove him from office. But in the Senate, the Republicans hold a 53-47 majority. In order to remove a president from office, the Senate needs a two-thirds majority (67 votes). At least 20 Republican Senators would have to join the Democrats. We believe the chances of that are negligible. Also, 55-60% of voters oppose impeachment. They seem to want Congress and Trump to get back to work solving our country’s problems.
History lesson No sitting president has ever been removed from office by impeachment and conviction. Andrew Johnson (1868) and Bill Clinton (1998) were impeached by the House, but they were acquitted by the Senate. Richard Nixon resigned in 1974 before the House had a chance to vote to impeach, but it was widely thought that both chambers had the bipartisan votes lined up to remove him from office.
No smoking gun Trump’s decision to release a full, unredacted transcript of the phone call with Ukraine was the right decision in our view. If he has nothing to hide and if there was nothing improper discussed on the phone call, then voters and investors would be able to judge for themselves. Transparency is the best disinfectant. We’ve reviewed the unclassified transcript, and there does not appear to be any quid pro quo linking $391 million in already-approved U.S. military aid to Ukraine and its government investigating alleged corruption involving former Vice President Joe Biden’s son, Hunter.
Boomerang potential? This situation has the potential to backfire on Pelosi and her party in two ways. First, if the House’s impeachment and subsequent vote fails, it could possibly awake heretofore somnolent Republican voters, much as the Clinton circus did for Democrats. In fact, Trump’s poll numbers and fundraising have risen in the wake of Pelosi’s announcement. According to our research friends at Strategas, in the November 1998 midterm elections Democrats went from a possible 40-seat loss to a five-seat gain in the wake of Clinton’s impeachment the month before.
Second, do the Democrats know for certain Biden has no culpability with regard to the corruption charges that Ukraine was investigating when he served under President Obama?
What’s the problem? In 2014, Ukraine was investigating alleged tax violations by Burisma, a private natural gas company, which employed Hunter Biden in 2013 as a member of the board of directors at a reported salary of $50,000 per month for consulting services. He left in April 2019. In 2016, Ukraine found no criminal wrongdoing by Burisma, and after the company paid additional taxes in 2017, the investigation was closed.
The potential problem is that Vice President Biden, while participating in a 2018 panel discussion hosted by the Council on Foreign Relations, said he was representing the U.S. in diplomatic discussions with Ukraine. Biden told the panel he had threatened to withhold a $1 billion loan guarantee unless Ukrainian prosecutor Viktor Shokin, who was handling the Burisma investigation, was removed from office. He subsequently was, potentially squelching the inquiry.
Could this impact the presidential election? Because Pelosi has ordered a formal impeachment inquiry, a deep dive into this matter may also get to the heart of Biden’s possible involvement. To be sure, it is pure speculation at this point in time, but any real or perceived taint could negatively impact Biden’s winning the Democratic nomination for president in 2020, for which he’s currently the frontrunner.
Be careful what you wish for That seismic political shift could potentially change the power dynamic impacting the election. Senators Elizabeth Warren (Mass.) or Bernie Sanders (Vt.) likely would be the Democratic candidates next in line to be the party’s standard bearer, given current polling.
That raises two key questions. First, how might Warren or Sanders, who are further to the political left of the moderate Biden, perform against Trump in the general election? And second, if either Warren or Sanders actually won the presidency, how might their more progressive fiscal policies impact the economy, corporate earnings, the labor market and financial-market performance compared with Biden or Trump’s more market-friendly policies?
Much ado about nothing We believe the Ukraine situation will prove a nothingburger rather than a smoking gun, although stocks may remain volatile in coming weeks due to headline risk. Ultimately, economic and corporate profit fundamentals drive stocks. Congress would be better served working on bipartisan legislation to address the country’s most pressing issues, such as immigration reform, infrastructure, health care and trade. In fact, we believe that Trump will now be more motivated to conclude the China trade deal, perhaps as early as the Asia Pacific Economic Cooperation (APEC) Summit in Chile on Nov. 17.