The Compound and Friends - How Will Impeachment Affect the Stock Market (with Josh, Michael and Eddy Elfenbein)

Episode Date: September 27, 2019

House Majority Leader Nancy Pelosi announced the beginning of formal impeachment proceedings of President Trump. As investors, it's important to remember that we don't have a lot of history to go by in terms of what impeachment might mean for the stock market and the economy. But there are some important takeaways from past impeachments of Richard Nixon and Bill Clinton. Crossing Wall Street's Eddy Elfenbein stopped by to talk about what the impeachment announcement actually means for investors in stocks and bonds. Eddy is a market historian, prolific blogger and an equity fund manager based in Washington, D.C.. You can check out his site here: http://www.crossingwallstreet.com/ And follow him on Twitter, where he is both hilarious and insightful on a daily basis: https://twitter.com/EddyElfenbein 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/     #Stocks #StockMarket #MakeMoney #Wealth #HowToInvest #Investing #Money #Trading #RetirementInvesting #FinancialAdvice #InvestmentAdvisor #FinancialAdvice #PersonalFinance Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, I'm Josh Brown. We are live from the compound. I'm here with Michael Batnick and our friend Fast Eddie Elfenbein, legendary billiards player and all around – what do you call yourself, a rat contour? Yeah, pretty much. Oh, yeah. All right. We'll maybe get into that. But today, we're going to talk about the effect of impeachment on the economy and the stock market. We're going to really dive in here and look at the historical examples. I think you'll learn a lot. Stick around. All right. First of all, Eddie, you're in town from

Maryland. D.C. D.C. It's very important that you make that distinction. Yes. Yes. Why? Because we don't have voting rights in D.C. We're not a state. So we have to make that clear. No senator, no rep. Got it. So D.C. right now is on fire, effectively. And it looks like the Democrats are going to move forward with formal impeachment, I guess, investigation would be the way to put it. Yeah, they're opening an investigation of impeachment, which is sort of an odd way to do this. But I think Nancy Pelosi has a base she needs to placate. And for the this. But I think Nancy Pelosi has a base she needs to placate. And for the first time, I think they really have some... You don't think she wants to do it. You think the party is pushing her to do it because we've reached some sort of tipping

point. Absolutely. And even AOC, you know, the congresswoman, she made noises about that. So I think there's pressure coming on Pelosi. Okay. So she's going to do it. It seems as though she said she's going to do it. So this is an investigation of impeachment. It's not the actual impeachment. Which is a very odd standard. But yeah, that's what they're opening the investigation to see if they can investigate which impeachment and those proceedings is an investigation anyway. Okay. So I think she's going in half steps. And I think now there are over maybe 200 confirmed votes for impeachment. In the House?

Yeah. Okay. So now there are six separate committees that are going to be working on parallel tracks, looking at everything from bribery allegations to all different types of corruption, national security issues, etc Which leads me to believe as an investor that this is not an event This is now going to be the ambient noise that's in the background for I don't know. I'm gonna guess a year Okay, like this is gonna in other words. This is not gonna be something that like wraps up It's just gonna go on and on forever. But so the market has not reacted at all. S&P 500 is up 20 basis points today. Well, it's not sudden.

What do you mean? It's been building for a year. Yeah. Yeah. So the market is not all of a sudden now pricing an impeachment. Okay. That's been priced in for a while.

But what if the market was on 2% today? You probably wouldn't be saying that. So here's what I want to get into. Number one, we don't have a big historical data set for how stocks have acted during impeachment periods, I guess. But why don't you get into a little bit like we have Nixon and Clinton in the modern era. I don't know if you want to go back to Jackson or do we have – Johnson. Johnson.

We don't have stock market data for that really that's reliable. I mean there is stuff, but I'm very, very leery of those kinds of numbers. Here's what I'll say. Now, first is, this is a lot of theatrics, what they're doing, because the base is not pleased with a lot of the Democrats in Washington. And then on top of that, you have this parallel universe of the candidates running for the nomination. And they are taking a much more liberal line, an anti-Trump line, than a lot of the elected representatives. That's why this is

kind of a half measure. And you talked about all these committees looking at the—the most important thing, it's the Judiciary Committee. If you get something like, you know, the Irvin Committee, you know, back in the 70s. Okay, that's serious. That's when we're actually looking at impeachment. But the Judicial Committee is part of this, no? I mean, but they're looking, they're investigating to see if impeachment is on the table. So I think Pelosi is trying to work a halfway measure, you know, without this being maybe a formal impeachment investigation. Don't we think that this should really be separated from the economy?

Like, in other words, this has political ramifications, obviously, not necessarily economic ramifications or stock market ramifications. What if it does? What if Donald Trump is more eager than ever to actually have a detente with China, given that the economy is pretty much all he has to run on? Like he appointed a bunch of conservative judges, but the big thing is like the stock market has done well. The economy, I would argue, until the cows come home, but it's good. And part of what he's done with tax cuts has helped that. But then the trade war

has hurt it and if he now feels more pressure than ever to get a trade deal done with China and then wrap up the thing with Mexico

and China and Canada which is going to happen in November and get all of these things in a row to boost the stock market then maybe there are

ramifications well maybe there are I guess my point is how do we handicap them? How should we behave as investors? I don't know. I would say, Keith, here's the thing is, it's how much does impeachment—this is the Nixon example—is how much does impeachment hamper the Trump administration?

Nixon really had his hands tied. That's why we see all these terrible events that happened. There's the October 73 war in Israel, the inflation, you know, terrible inflation through 73 and 74. The market was in a decade-long bear market. Yeah, and it was all coming to a head. I mean, remember, at the time, that was the worst crash since the Great Depression. And there were people who remembered that. And then on top of that, we have Vietnam was falling apart. That happened in 75, the death on top of that, you know, we have Vietnam was falling apart, that happened in 75, the death of Franco and Salazar in Portugal, sort of fascism comes to an end. This all happens in a very brief period of time

and Nixon could, we know the Soviets just pulled away and said we're not dealing with you because this is going south in a big way. If that happens to Trump and we really see that he is just immobile, that could have broader impact. But it all takes place in the larger context that the economy was falling apart for Nixon and Republicans. So 73, 74, were those twin bear markets? It was one. It was a continuation. It all began.

But we dropped 50% and it was like a wrenching period of time. That 74 low. The volatility was wild. 74 low was really low. Right. It was much lower than the lows we saw in the 60s. And it was an end, really, to a bull run that we saw going back to 42. That's how long it was.

Into 68 was the top. Yeah, yeah. And it kind of rolled over. It played with 1,000 for a while. And there was a bear market in 70. And then 73, 70- ED HARRISON That was the nifty 50 stocks blowing up. MICHAEL MOROZ That was later.

The 70 market was- ED HARRISON 72 was the peak of nifty 50s. MICHAEL MOROZ Exactly. The 70 market was a lot of the unlisted names and small names. That led to the NASDAQ in 72. That's when it launched at 100 because they tried to say, OK, we're getting a handle on this market. But how much of that stock market turbulence was due to the Watergate investigation intensifying versus just inflation is bad and people are miserable for other reasons that have nothing to do with politics. But I think it all plays together because Nixon was seen as not being able to respond to these issues.

We didn't know what to do about inflation. People didn't know at that time. What do we make about the way that people were investing back then? It was so different in terms of how they were invested, holding individual securities versus funds today. There were no 401ks. So a stock market drop was not good, but it didn't have the same psychological impact on 100 million people. Well, there weren't regular buyers every two weeks.

Correct. So that's the big difference. The number of people who invested in the stock. Remember, we had fixed commissions before 75. So the stock market was not sort of a consumer finance thing that we know of today. On TV, there was no CNBC talking about how the market will be impacted by the decision. Lewis Rukeyser was it. But the thing that people forget about, they say, it's different this time. Well, it does change. People view stocks fundamentally different today than they did back in, say, the 1950s.

But I think we reoriented the economy around the consumer. And I'm not saying it's good or bad. We just did. And we reoriented the whole concept of retirement around 401k. In the 70s, it was pensions. So, yeah, the stock market dropping had an impact on pensions' ability to pay out. But that's secondary. The person that worked at Lockheed Martin and was retired, they weren't worried about

their pension because of anything the stock market did. This is a very different environment. And I do feel that the wealth effect is what's driven a lot of the gains in the economy. And what else is dictating the wealth effect beyond housing prices and 401k balances. I think that's really it. I mean, they've done that, so that's now the world we live in.

So I think that's like a secondary issue. I wanted to ask you about the Clinton impeachment. So that one, it felt like at the time for me, I was like 21 or something. That felt like it was going for me, I was like 21 or something. That felt like it was going on forever, 1998, 1999. I'm not even sure when it finished. He finished his term.

Stock market didn't give a shit at all, frankly. No. And there were other issues that really rocked the stock market at that time, the long-term capital. Unrelated to that. Exactly, exactly. What currency blowups in Thailand. Oh, yeah, that was bad. That had nothing to do with Russia and all of that. Yeah, absolutely.

I think that impeachment was seen as much as very, very partisan as this investigation is as well, where in Nixon, it was more bipartisan. You had more Republicans say, okay, this is not going to end well. One of the things about the Nixon situation was that when he finally resigned, it was at the bottom of the stock market. Absolute bottom, yeah. And that was going into a midterm election. And I think the party went to him and said, we're not going to back anymore. And that's what was the signal for him that like none of that is happening now number one and then number two Nixon didn't have Fox News I think that's a lot of air cover that keeps

politicians in line behind Trump and I think it's hard to imagine it could happen in an hour it's just hard for me to imagine Trump feeling the same pressure also resign. But also, remember, we have the playbook now from Clinton, from the governor in Virginia. Write it out.

Don't apologize. You know, make a couple notes. Never apologize. And just keep going. Nixon also didn't have Twitter. Nixon didn't have Twitter. And then there are people that say that Nixon loved America

in a way that Trump doesn't. Like, Nixon didn't really want the republic to burn down. I mean, that's touchy-feely shit. Who knows way that Trump doesn't. Like, Nixon didn't really want the republic to burn down. I mean, that's touchy-feely shit. Who knows if that's really true? But remember, at this time, you know, in 73, the war, back years ago when I was in the National Guard, I served with people who were in the military then. They said everything was taken off the shelves in 73 and sent to Israel.

My point is, it was a far more dangerous world back then. And if you had the president of the United States, the leader of the free world, just completely immobile and shackled by domestic politics, that is not good for global security. It really doesn't exist in that form today. In other words, you think that Trump could become a pariah in Washington and nobody help him accomplish anything for the rest of this term. And he could stand right up. And the market will not be as fearful of that.

Is that sort of the best case scenario? Yeah. Yeah, I think so. Do we think that there's any feedback loop in terms of, like, interest rates or the strength of the dollar related to what's about to go on politically? Or is it too – is the world too global? Yeah, I don't think it's so connected because we're really seeing – you know, it's the impact of negative rates, which has been building – that's been a long story that's been building for a while. You could say the trade, it definitely has an impact. But I think as far as the global economy,

I don't think that's so related to this. Do you think that there are, so you're a stock picker and you're an investor. Do you think that there are investors who are right now actively doing things within their portfolio to either prepare for what's about to happen politically or to secure themselves better? Or do you just think like most professional investors are whistling past this? I mean, there are people always making dumb mistakes. So, yeah, I think there are people always making dumb mistakes. So yeah, I think

there are people who are freaking out about this. Let me take a step back. The problem, a mistake that so many investors make is they mistake the structure of markets for the markets. What does that mean? Now, let me give you an example, is that you'll get these endless debates about the impact of monetary policy, endless debates about the impact of politics, buybacks, and interest rates. This is not the market. These are things that go to support the market and support the structure of the market. That's not the thing itself.

Yet again and again, that's what people say, that buybacks are somehow sinister and driven by the Fed and the Fed is manipulating this. That's not what's going on. The markets, when they work best, are a radically decentralized organism. And that's very difficult for people to wrap their minds about, that nobody's in charge. Meaning there are decisions being made to buy and sell different securities every day that are wholly unrelated to. Well, that's a good point. Nobody's in charge. Meaning there are decisions being made to buy and sell different securities every day that are wholly unrelated to. Literally millions of people. Nobody's in charge. No one is in charge.

And that's difficult. Jerome Powell's not in charge? Not at all. Not even Barry Reynolds. He doesn't create the environment, though, in which different types of investing are more in favor, like high dividends because bond yields are low. That's like none of that is important. It's not that it's not important, but it doesn't come from one source. It just comes from, you know, it does come out of the ether.

That is the brilliance of markets, at least when they work as they should. So I guess that's true because like whatever the Fed's doing is in response to something that they don't control. The Fed is a player on the field. That's what people don't understand. But they're not in charge. Or you'll see these say the market under Obama, the market under Bush or whatever. And they act as if that the presidents are players on the field and the stock market is the scoreboard. That is totally wrong.

stock market is the scoreboard. That is totally wrong. If anything, it's the exact opposite, because you see, as you were just talking about, it's the developments in finance that drives the public policy response. It's the complete opposite. What if somebody says to you, Eddie, I get your point. I understand it's different and things change. However, when somebody like Elizabeth Warren becomes tied with Biden in the polls and her stated intent is to change the balance of who has wealth and one of the instruments by which she's going to do that is tax policy. Another instrument is tougher regulation on financial institutions and markets and there's going to be trading tax. Let's say you think she has a shot to beat Trump and you think she's going to be trading tax. And like, let's say you think she has a shot to beat Trump and you think she's going to be the nominee. Not only is she a player on the field, I feel as though even before she gets elected, market

participants probably start pricing in that potential. I mean, how could they not? Absolutely. But the difference is we're talking about policy that, to continue with this sloppy metaphor, does go on the field. If you talk about corporate tax rates, if you talk about wealth taxes, sure. And what's also interesting is how often when policy does impact the market and it's unintended, nobody realized that. You saw the Smoot-Hawley tariff or back in the 90s when there was the luxury tax. That wasn't that controversial, but it had enormous impact.

So I'm not saying that policy doesn't impact the market. It's a great way to think about it because one of the main things that Trump ran on was I'm going to bring back the industrial economy. I'm going to restore the oil and gas companies to power and steel. And actually, he did everything he said he would do. That's like one of the ways that Trump was most effective in relation to his campaign promises was slashing regulation. Now you can fucking frack the Grand Canyon. You could drill five miles offshore if you want. Like, you can do anything. Has that helped oil companies? They're actually the smallest in

relation to GDP that they've been in maybe ever. I think the XLE really hasn't moved in 20 years. Right. So oil stocks have just been absolutely decimated. So he's done all of those things. But to your point, the unintended consequence is too much oil. It's not good for anyone. But I mean, that's, you know, the U.S. deal is down 50 percent from Inauguration Day. Like there's a lot of examples of that. But you always get in the phrase, the person wears the medals of their defeats and that and you get the vice versa. Was Obama, was he helped by an economy that was greatly aided by fracking?

Absolutely. Yes. Did he support fracking? No. Probably not. We don't know. But that happens all the time. It's called irony. That's what drives the world. All right. So in conclusion, it's very, very difficult to say that what the stock market is pricing in now, whether it's overdoing it or underdoing it. And there will probably be volatility from political headlines just because there always is.

But you would basically say, like, there is just no way to take this one thing that's going on and have that be the only variable that will determine future prices. I mean, this is how I describe it, is on average, the stock market moves over the long term about one thirtieth of one percent a day. So a $30 stock goes up one penny each day. The average swing, the daily swing is one percent a day. So that means 97 percent of what you see each day on average, that's on average, is complete noise. It means absolutely nothing. That's incredible.

So with that said, what's your year-end price target? Yeah. What are your favorite sectors between now and year-end? Seven stocks to buy for... What are your seven best impeachment plays? I just don't understand how the mindset of investors has to roll around these neatly packaged ideas because they're fun and we could do them in Easy to spin out just go over to the New York Times website

See whatever is trending and say seven stock to buy for that dude. I'd click on that shit. You click on it All right. Tell us tell us before we wrap tell us what's going on in your world. So you're running the ETF I got an ETF out there. Are you even allowed to say the name or do they come crashing through the window? You would not believe the level of regulation. I know. I had a question. What's the name of your ETF?

It is the Advisor Shares Focus Equity ETF, ticker symbol CWS. You might go to jail for revealing that. I don't know. If you ask me, I can answer, but I can't say it. It's amazing. All right. Well, listen, you're one of the first blogs that I ever read crossing Wall Street. When did you start? 2005. Okay. So I can't recommend people look at your fund, but I can recommend they subscribe to your buy list where you basically talk about your favorite names and you're very patient they

don't change very often you hold the same stocks for at least a year mm-hmm okay is it heller high water or yep yep so it's it's 25 stocks in the buy list we change each year five stocks five come in five go out and are you stuck with what you start absolutely stuck with it okay has ever been a time where you didn't change anything? One year to a next? I always do five. I always do five. Sometimes things are bought out and spun off, but never just sold. What are the five

new stocks that you put, are you allowed to say, that you put on for 2019? I can't say that yet, but I'll reveal those in December. Okay, fair enough. Love it. Thank you for coming by. If you'd like a tidy recap, impeachment may or may not affect the stock market in ways that we may or may not be able to

determine in advance. For most investors, their best bet is to keep the headlines separate from what they actually own and invest in. Did you say that's accurate? That is accurate. Eddie, you're the man. Thanks for joining us. Make sure you follow. What's your Twitter handle? Eddie Elfenbein. At Eddie Elfenbein on Twitter. Check out Crossing Wall Street blog, and we will be back with you soon. Where are the people?

Are they? What? No, they're watching you on Instagram and YouTube. Gotcha. All right, thanks.