As the impeachment hearings unfold, stock markets yawn.  I just wanted investors to look back at Watergate with the ill-conceived plan of breaking into the DNC office for election purposes.  Today, we seem to learn of a possible ill-conceived plan of pressuring a foreign leader for election purposes. While the events may prove totally disparate, I just wanted to illustrate that politics sometimes matter meaningfully. My point is markets may in fact be mispricing a substantive “tail risk” event.

Vertical lines display Wikipedia’s timeline of Watergate news events I selected.

  1. June 17, 1972: The plumbers are arrested at 2:30 a.m. in the process of burglarizing and planting surveillance bugs in the Democratic National Committee offices at the Watergate Building Complex.

  2. November 7, 1972: Nixon re-elected, defeating George McGovern with the largest plurality of votes in American history.

  3. January 20, 1973: Nixon is inaugurated for his second term.

  4. May 19, 1973: Independent special prosecutor Archibald Cox appointed to oversee investigation into possible presidential impropriety.

  5. July 23, 1973: Nixon refuses to turn over presidential tapes to Senate Watergate Committee or the special prosecutor.

  6. October 20, 1973: “Saturday Night Massacre” – Nixon orders Elliot Richardson and Ruckelshaus to fire special prosecutor Cox. They both refuse to comply and resign. Robert Bork considers resigning but carries out the order.

  7. March 18, 1974: Judge Sirica orders the grand jury’s sealed report to be sent to the House Committee on the Judiciary.

  8. August 9, 1974: Nixon resigns from office. Gerald Ford becomes president.

My Thoughts

Politics may play little role in financial markets. For me, extreme events alter human behaviors and thus markets.

  1. A morbid example: terrorism plays almost no role in markets. Israel and the US experience domestic and foreign terrorist acts. far too often, killing multiple citizens with little change in market prices. Extreme terrorism alters human behavior for some time and affects market values.

  2. Line 6: Thirteen months after the crime, “Nixon refuses to turn over presidential tapes to Senate Watergate Committee or the special prosecutor.” The S&P 500 remains unchanged but then declines ~ 10%

  3. Line 7: Judiciary invoked and the S&P 500 declines ~ 20%

  4. Line8: Nixon resigns and market declines ~ 20%

Key Takeaways

  1. 48% loss from beginning to end.

  2. Not until our judicial branch backed Congress did S&P 500 losses quicken. (Line 7)

  3. Nixon’s resignation precipitated losses and then a recovery in Hope a constitutional crisis passed.

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