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How Trump's impeachment could harm markets

Rick Newman
Senior Columnist

Impeachment proceedings against President Trump won’t affect corporate earnings, or stock and bond prices, directly. But the political war in Washington changes the outlook for some key policy issues that investors should pay close attention to.

Democrats and Republicans don’t cooperate very much these days, but the House’s effort to impeach Trump will raise the usual standoff to cold war levels. “The latest impeachment imbroglio is a negative catalyst for markets,” Beacon Research advised clients on Sept. 25. “While political gridlock is often good for markets by reducing the risk of government interference, dysfunctional paralysis of government is not because it increases uncertainty over the government’s ability to handle a crisis.”

Trump’s trade deal with Canada and Mexico—the USMCA—could be the first casualty of impeachment. Trump finalized a deal last year to replace the old North American Free Trade Agreement, but Congress must ratify it before it goes into effect. And that now seems unlikely. “Bipartisan action on … the passage of the USMCA (the new NAFTA) is dead until after the 2020 election,” writes Ed Mills of Raymond James.

The next question is whether Trump withdraws the United States from NAFTA, as he has threatened to do, or remains in the old NAFTA. Watch out below. “We think that the political one-upmanship between President Trump and Speaker Pelosi could culminate in a series of decisions that ultimately leave the United States without any North American free trade agreement,” writes Stefanie Miller of Sandhill Strategies.

This could be tumultuous. Tariffs or other new barriers to trade among the three nations could damage the auto industry, which dominates trade between the United States and Mexico. U.S. farmers could be hurt, too, since much American produce goes to Mexico. It would be self-defeating for Trump to blow up NAFTA and harm the U.S. economy as he’s vying for reelection. As the whole world knows, however, Trump can be contrary and unpredictable.

Negotiations with China

Impeachment will affect Trump’s trade negotiations with China as well. On one hand, Trump will become more desperate for some kind of deal he can point to as a win, while also eliminating the economic harm the trade war is causing. Some analysts think that could lead to a mini-deal that doesn’t accomplish much but deescalates the situation, which would cheer markets.

Speaker of the House Nancy Pelosi, D-Calif., is surrounded by reporters as she arrives to meet with her caucus the morning after declaring she will launch a formal impeachment inquiry against President Donald Trump, at the Capitol in Washington, Wednesday, Sept. 25, 2019. (AP Photo/J. Scott Applewhite)

But that could only happen if China went along. President Xi Jinping might choose instead to wait Trump out and see whether he survives impeachment. The battle with Democrats weakens Trump’s hand with China, because he’s fighting a rear-guard action on his home turf while also taking on China. Trump’s reelection odds are already weak, given his low approval ratings, so China might just wait for the election. And we’ve already seen that a spurned Trump can ratchet up the trade war without notice. It’s hard to predict whether impeachment will intensify or ease the trade war with China. But it probably moves one way or the other instead of drifting along in its current state.

Legislative action

Political combat between Democrats and Republicans probably raises the odds of a government shutdown later this year, as spending bills expire. President Trump may speed up his plan to lower prescription drug prices, to distract from negative news on impeachment. That plan would only be an administrative action, though, making it subject to legal and logistical challenges, like other Trump orders.

The biggest unknown is whether impeachment will hurt or help Trump, which carries implications for who the next president is likely to be. The Republican impeachment of Bill Clinton in 1998 boosted his approval ratings into the 60-percent range, because Americans thought it was a politically motivated, well, witch hunt. Trump undoubtedly hopes impeachment does the same for him. A lot may come down to how he responds.