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The House Impeached Trump, and the Stock Market Did Not Crash Like He Said It Would

Photo: Mark Wilson/Getty Images

I understand the president’s dilemma. On one hand, he wants the stock market to hit record highs, so he can brag about it. On the other hand, he wants to feel essential to the stock market’s strength. This latter imperative is why he has repeatedly warned that impeaching him would lead to a stock-market crash, which has not materialized now that he has actually been impeached.

Of course, even if impeachment is important for stocks, we shouldn’t have expected the stock market to move on Wednesday’s impeachment vote. The market reacts to news, and from the market’s perspective, the vote wasn’t news because we all knew in advance what the vote result would be. But the market does not even seem to have been moved that much by real impeachment news, such as the unexpected political developments early this fall that led Democratic leaders who had been resisting activists’ demands for impeachment to change their minds and roll toward impeachment.

Stocks did drop a few hundred points on September 24 when Nancy Pelosi announced the opening of an impeachment inquiry into the president. But the losses were quickly regained, and stock market has continued to hit periodic record highs. As I wrote back in September, the markets worry about impeachment to the extent impeachment can hurt the future after-tax profits of corporations. The worry I identified at the time was that impeachment could cause Trump to lash out in ways that would do so, such as intensifying the trade war. But in the ensuing three months, he has managed to keep the trade war at stasis or better, helping the markets calm down.

Investors might also worry about how impeachment will affect who governs the country, and what policies will therefore get made that affect corporate profits. In general, political partisans overestimate the effect that election outcomes and even public policies have on economic output. The most important policies affecting both economic output and stock prices in the short and medium term are monetary policies, and the markets have been highly reactive to policy actions at the Federal Reserve, but that doesn’t have much to do with impeachment. But policy changes can have bigger effects on after-tax corporate profits than on the economy as a whole, and therefore can move the stock market even if they won’t affect the broader economy that much. A good example is the corporate tax cuts in the 2017 tax package, which reduced corporate taxes and therefore increased the expected return from holding stocks, which is a reason the stock market has done so well even though the economy enjoyed only a small and temporary boost from the tax cuts.

But the tax cuts are water under the bridge. In the very unlikely event that the Senate removed Trump, the new president, Mike Pence, would remain a supporter of low corporate taxes. And even if a Democrat wins the next election, he or she is likely to face a Republican-controlled senate or one with a narrow Democratic majority.

In the latter case, tax increases are likely to be on the table, but the corporate tax cuts are likely to prove more durable than Trump’s personal income tax cuts for high earners — in part because raising corporate taxes would tend to push down stock prices and therefore create political problems. (Elements of the corporate tax cut package also have significant support on the Democratic side of the aisle, though Democrats would not have cut the rate so low as 21 percent.) Higher personal income tax rates are of course a concern for wealthy owners of stocks, but they’re not a concern that would be expected to show up in stock prices themselves.

And finally, there’s no reason to infer from the polling or the prediction markets that impeachment has made Democratic control after the next election more likely. In fact, the PredictIt markets have Trump’s reelection odds a few points higher now than when Pelosi announced the inquiry in September. I don’t put too much stock in that change — the prediction markets are not deep and liquid like the stock market, so they’re not as reliable a read on sentiment — but it’s another data point supporting the view that Democratic odds have not gone up.

If you’re a political observer, you may be coming around to the view that impeachment doesn’t matter very much. (I certainly am.) Public opinion isn’t moving. Trump isn’t going to be removed. The government after impeachment is going to look very much like it did before it. This is the stock market’s view, too — if impeachment isn’t going to change anything else, why should it change stock prices?

House Impeached Trump, and Stock Market Did Not Crash. Sad!