Market's reaction
to scandals
which affect
the presidency
Market's reaction
to scandals
which affect
the presidency
by Yale Hirsch
Smart Money
A
major question on investors' minds whenever a huge White House scandal erupts
is what the effect might be on the stock market. In the four weeks prior
to the President's appearance before the grand jury, the Dow shed almost
a thousand points.
The
Clinton grand jury appearance and four-minute television "confession"
brought relief to the stock market to the tune of almost three hundred Dow
points within 48 hours. Still, it is unknown what Independent Counsel Kenneth
Starr will be including in the report he will be submitting to Congress
shortly and what effect it will have on the Presidency, the nation or the
world.
President
Ulysses S. Grant in 1876 had four members of his cabinet involved in scandals
(the Secretaries of Treasury, War, Navy and the Attorney General). The market,
as measured by the Cowles index (there wasn't a Dow Jones or S&P at
the time) fell 20.3% in the nine months leading up to the presidential election.
More importantly, the Republican party almost lost the presidency to Samuel
J. Tilden, who won a majority of the popular vote, but lost to Republican
Rutherford B. Hayes when the contested election was decided by the Republican
House. The Panic of 1873, set off by the failure of Wall Street banking
firm Jay Cooke and Company, triggered a five-year depression, which did
not help the Republicans.
Vice
President Calvin Coolidge assumed the presidency on August 3, 1923, the
day after the death of President Warren G. Harding. Harding died of apoplexy
at the age of 57, following his ptomaine poisoning attack on the 27th of
July. After Secretary of Interior Albert Fall and Secretary of Navy Denby
were charged with fraud and corruption in execution of 1922 oil leases on
February 8, 1924, the market dropped 12.8% over a three-month period. As
these activities, which became known as the Teapot Dome Scandal, did not
occur on President Coolidge's watch, he was able to win a full term in his
own right in November. Ironically, President Harding had an illegitimate
daughter a year before his election. Also, a recent biography of Mrs. Harding
tells of the many affairs that her husband had, including one in 1911 with
her best friend.
| MAJOR WHITE HOUSE SCANDALS AND EFFECT ON STOCK | ||||
| YEAR | PRESIDENT | SCANDAL | PERIOD | % DECLINE |
| 1876 | Grant | In Departments of Treasury, War, Navy, Attorney General | Feb 1876 - Nov 1876 |
-20.3% |
| 1924 | Coolidge | Teapot Dome | 2/6/24-5/20/24 | -12.8% |
| 1973/74 | Nixon | Watergate | 10/26/73 - 10/4/74 |
-40.8% |
| 1987 | Reagan | Iran-Contra | 8/25/87 - 10/19/87 |
-35.1%* |
| 1988 | Clinton | Lewinsky | *A coincidence, most like | |
Though
Richard Nixon won reelection in a smashing landslide in 1972, he was unable
to enjoy the fruits of his victory. A clumsy, senseless break-in to bug
Democratic headquarters on June 17th at the Watergate, orchestrated by Howard
Hunt and G. Gordon Liddy, prior to the sure-win election, grew into a scandal
of epic proportions with more indictments than any other scandal. Over a
year and a half of agony for the nation was ended with the resignation of
President Nixon on August 9, 1974.
The
major blow which shook the confidence of the public was struck on October
20, 1973 in what has become known as the "Saturday Night Massacre."
Special Prosecutor Archibald Cox was dismissed by Nixon for "defiance"
along with Deputy Attorney General William Ruckelhaus. Attorney General
Elliot Richardson, who refused to fire Cox, resigned.
Our
forces around the world were put on alert to thwart any hostile groups from
taking advantage of our perceived momentary "weakness." However,
OPEC nations, reeling after Israel repulsed Egyptian and Syrian attacks
which began October 6th, on the high holy day of Yom Kippur, laid down an
embargo on oil exports to the U.S. This, and the escalating oil price increases,
led to the biggest bear market since the thirties, and harmed the world
economies for a decade.
President
Ronald Reagan was caught up when the news of the Iran-Contra scandal broke
November 3, 1986 in a Lebanese magazine. Millions of dollars had been illegally
diverted to the Nicaraguan contras fighting the Marxist-oriented regime
of Daniel Ortega. This was in violation of the Boland Amendment of 1984,
which prohibited direct or indirect aid to the contras. The major players
were Oliver North, National Security Adviser Robert C. McFarlane, Admiral
Poindexter and CIA director William Casey. During the hearings that were
held between May and August 1987, William Casey died and many secrets of
the conspiracy died with him. Ironically, the market topped out at 2722.42
on August 25th and the crash came in October with a one-day drop of 22.6%,
the biggest ever. Most likely, the bear market loss of 36.1% was coincidental
and there was never any proof that the President or Vice President Bush
were directly involved.
With
President Clinton, it is now clear that he employed the wrong strategy.
By not fessing up immediately, he allowed the enormous build-up in the media
to become a circus entertainment. An early statement of the truth would
have defused the media and the Kenneth Starr investigation. While the market
did lose a thousand Dow points prior to the Clinton appearance before the
Grand Jury, no one knows how this scandal will play out. With the major
problems in Asia and Russia and a very vulnerable stock market here, a Starr
report to the House which would compel impeachment hearings would definitely
lead to a bearish scenario.
We
note that in most cases problems surfaced in the second Presidential term.
Maybe it's because arrogance or weariness tend to set in. Maybe because
the honeymoon is well over, and critics have an easier time making their
case.
Is It A Bear Market Or Correction?
With
the Starr Report likely due in September (our guess), the market is highly
unlikely to turn bullish. Add the unhealthy economic picture in Asia and
the mess in Russia, which can only worsen as the cold winds from Siberia
appear in the next few months, and the situation looks bleak.
Most
stocks, besides big blue chips, have had it and are way off their highs.
While the Dow was just about 10% off its 9337.97 high of July 17th, the
Russell 2000 average was down 18.5%. Let's face it, if it weren't for the
top 100 largest capitalization companies, everyone would be acknowledging
that we were in a bear market. Shall we speak louder? BEAR MARKET!
It's
been so long since we had one that the experience has been forgotten. Most
investors can remember the three previous downdrafts we had in 1996 and
1997, which were one- or two-month affairs. Intraday, the ones ending July
16, 1996 and April 14, 1997 were both off 10.3%. The mini-rash we experienced
in October 1997 was the end of a 13.3% decline, both closing and intraday.
These were the "buy-on-a-dip" corrections which saw billions pouring
in to take advantage of the discounts and saw the lost ground made up within
30 days mostly. Our current 10.3% drop based on the intraday low, may be
a horse of a different color.
The
market was pretty flat in 1994, but small stocks were clobbered. Only two
genuine bear markets occurred in the last 15 years and both were of short
duration. Saddam Hussein, by invading Kuwait, caused the 1990 bear which
only lasted three months and trimmed the Dow by 21.2%. This was preceded
by the crash in 1987 which saw the Dow decline by 36.1% in less than two
months.
During
the fifties and sixties, bear markets usually began near year-end and petered
out in the fall, most often in October. With Vietnam and the blows struck
by the OPEC cartel came extended bear markets. These lasted into a second
year and ended like clockwork every four years, as in 1970, 1974, 1978 and
1982. A 65.7% move off the 1982 bottom that lasted 15 months brought about
an eight-month 15.6% decline in 1984 which can be considered a bear market,
but some might want to call it a correction.
What
will it be in 1998? If Asia and Russia find a miracle cure for the economies
and Mr. Starr's report to Congress doesn't bring down the President, we
will have suffered a correction only. Frankly, the chance for this bullish
scenario seems slim. If it's "down we go," a more likely happening,
the damage could be swift and over in a few months. October would be the
likely place for the bottom. If the political situation drags out and goes
on and on, we could be in for an old style longer-lasting bear.
There
is one bullish picture on the horizon and that is the pattern that has produced
an average 50% rise since 1914 between the mid-term low and the subsequent
high in the pre-election year, which would be 1999.
Editor's Note: Yale Hirsch is editor of Smart Money, 184 Central
Ave., Old Tappan, NJ 07675,1 year, 12 issues, $120. Smart Money now in its
26th year of publishing is a Bull & Bear recommended newsletter.
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