With the just-launched impeachment inquiry likely to consume President Donald Trump’s attention for as long as it lasts, one issue is less likely to hold his attention — his trade war with China. For markets, putting the trade war on the back burner may be a more significant catalyst than impeachment hearings, allowing stocks to head higher.
Indeed, Trump may find himself playing defense within his own party for the first time. Up until now, Trump has largely been free to pursue his own economic agenda, even if it was at odds with Republican Party orthodoxy and the interests of loyal voters in red districts. Previously, the only weapon Republican members of Congress had against Trump was public disagreement, for which they often paid a price. Former Republican Sens. Jeff Flake and Bob Corker retired rather than face voters after criticizing President Donald Trump, and Michigan Rep. Justin Amash left the Republican Party and became an independent after rebuking Trump.
But now, congressional Republicans have some leverage over the president. If Democrats in the House ultimately vote to impeach Trump, it’s possible that 20 Republicans in the Senate could end his presidency. They may pay a price with their own voters if they did that, but it also gives them power they previously haven’t had.
Few issues matter more for markets than the trade war with China. Although the U.S. economy continues to hold up reasonably well, the pockets that are suffering — manufacturing and farming — are mainly in Trump-friendly districts in the Midwest. Up until now, Republican elected officials such as Iowa Sen. Joni Ernst have largely defended the president even as they point out the pain it has caused in their states and districts. With global manufacturing in recession, Michigan and Wisconsin — two states Trump narrowly won — have lost manufacturing jobs during the past year.
Senate Republicans, should the impeachment process make its way to the upper house, might enjoy their newfound leverage. The president may need to reserve his political capital to shore up his support within his own party rather than pick fights over China. In fact, the president said today that a trade deal with China could be reached sooner than expected.
As markets digest the reality of impeachment proceedings, they may welcome the shift. Although markets crashed under the weight of a significant recession — partly the result of the 1973-74 Arab oil embargo — during the impeachment of Richard Nixon, this was not the case during the Bill Clinton impeachment. Those events, which played out from October 1998 through February 1999, saw markets initially stumble only to rally amid the booming economy of the late 1990s.
Impeachment may produce even more political gridlock than the 2018 midterm elections did. Although little legislation has been passed this year because of the partisan polarization in Washington, Trump has still been free to escalate his trade war. Impeachment proceedings, by comparison, will consume a tremendous amount of political and media oxygen and leave little time for an all-consuming trade war.
Ultimately, markets are going to be driven more by the state of the economy than Washington’s unending political drama. And as we head toward the end of the year, tailwinds for the economy remain. Rather than increase interest rates three or four times this year as the Federal Reserve anticipated in 2018, the Fed has cut twice and may cut rates again at either its October or December meeting. The housing market has improved after showing signs of contraction. Consumption and the labor market remain robust. Manufacturing is sluggish in the U.S. and even weaker abroad. But that sector is cyclical and has been in a slump for a while, leaving open the chance that it could rebound at some point soon.
If impeachment proceedings lead to a halt in Trump’s dispute with China while global trade and manufacturing recover, we may have ended up getting the catalyst needed for faster economic growth and a rally in markets.
Conor Sen is a Bloomberg Opinion columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.