Scooter Goes Down, Stocks Go Up

The Dow had one its best days in months on Friday, even though a top White House aide was indicted. If history is any judge, the stock market doesn’t care much about political scandals in Washington. In fact, stocks have often rallied during political turmoil.

The long-lasting controversy over President Bill Clinton’s financial dealings, punctuated by the suicide of a close adviser, didn’t prevent stocks from enjoying one of their greatest bull markets ever. Stocks did hit trouble in mid-1998, as the Monica Lewinsky scandal was dominating the news. Impeachment talk swirled in the fall, and stocks fell dramatically. But the problem on most investors’ minds then wasn’t Mr. Clinton. It was a Russian debt default, pervasive bond-market damage from the collapse of hedge fund Long-Term Capital Management and the steady slide of Asian economies.
By December, as impeachment loomed, the stock market was recovering, not tanking. From mid-December to mid-January, as the nation was transfixed by the impeachment, the Dow gained 9%, according to The Wall Street Journal’s Market Data Group.
Watergate was probably the scandal that most affected stocks. The Dow industrials entered a bear market at the start of 1973 and stayed in it through 1974, as Richard Nixon’s top aides and, ultimately, Mr. Nixon, himself, resigned. The scandal unquestionably contributed to the market malaise. But it probably wasn’t the main cause. Inflation soared in 1973 and 1974, from less than 4% to more than 12%, according to Ned Davis Research. The Arab oil embargo began in 1973 and continued into 1974. A recession began in late 1973 and lasted until 1975.
“When I think back to the 1970s, they were a time when we were confronted with a serious inflation threat, a loss of credibility on the part of the administration, and monetary policy was also off the rails,” says Stuart Schweitzer, global investment strategist at J.P. Morgan Asset Management in New York.
Oddly, the Dow industrials actually rose in the week and month following the Haldeman and Ehrlichman resignations. The Dow fell more than 15% in the three weeks following the Nixon resignation, in August 1974, but by year’s end, despite continuing uncertainty in Washington, stocks had begun a new bull market.
Market performance surrounding other Washington scandals has been more benign. A recession held stocks down during the Teapot Dome scandal, which involved abusive leasing of Federal oil reserves by Interior Secretary Albert Fall. But the worst was over in October 1923, despite President Harding’s death, and stocks were clearly recovering by the spring of 1924. The 1958 resignation of Sherman Adams, President Eisenhower’s right-hand man who had accepted a vicuña coat from a favor-seeking businessman, was barely a speed bump for the bull market of the time.
The October 1963 resignation of Vice President Lyndon Johnson’s protégé Bobby Baker as a top Senate aide — he was found to have links to organized crime — became an afterthought following President Kennedy’s assassination the next month. Even the assassination proved only a temporary impediment to that period’s bull market.
Stocks rose through the 1986 disclosure of the Reagan-era Iran-Contra scandal, in which money from covert arms sales to Iran was passed on secretly to right-wing fighters in Nicaragua. The market crashed in October 1987, but that was amid concerns over the trade deficit, the dollar, stock valuations and Wall Street excess.

This reminds me of the story of when Richard Nixon was asked what he would be doing if he weren’t president. Nixon said that he’d probably be on Wall Street buying stocks. They asked an old-time Wall Streeter what he thought of that. He said that if Nixon weren’t president, he’d also be buying stocks.

Posted by Eddy Elfenbein on October 31st, 2005 at 10:12 am

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