The Watergate Scandal and Today’s Financial Markets
I’ve always enjoyed a good political scandal. There’s something sort of satisfying in seeing powerful people get caught out. I won’t go so far as to say I’m a news junky, but I certainly keep up-to-date.
As I look at the current FISA Court scandals in Washington, the Watergate scandal of the ‘70s comes to mind. Seems to me that the two scandals are sort of mirror images of one another. I began to wonder what happened to financial markets during Watergate, and whether there are any lessons for us today? I thought it would be interesting to find out, and that my readers would be interested too.
There’s an excellent synopsis of the Watergate scandal here: https://www.history.com/topics/1970s/watergate
President Nixon was running for a second term. The Vietnam war was raging, and the nation was deeply divided over it. Protests on campuses. The Hippie movement. Hallucinogenic drugs. The Republicans hired burglars to bug the offices of the Democratic National Committee, in the Watergate complex. They planted microphones, which subsequently malfunctioned. Their operatives broke in a second time to replace the mics, but this time they got caught. During the ensuing scandal details came out bit by bit, and it became clear that the authority to both commit and cover-up the crime came directly from the Nixon White House.
The break-in occurred June 1972, and the President resigned in August 1974. The media, no friends to the Republicans then and now, churned this thing for as long as it had life, and everyone was sick to death of it.
Quite as an aside, the Watergate complex in DC is architecturally stunning. Too bad it is forever linked to this break-in. Ever since then, Washington scandals have the suffix-gate attached, as in Spy gate.
The Current Scandals
In today’s scandals, details continue to seep out. But we know this: Hillary’s campaign hired a British firm to concoct a phony dossier describing Russian collusion with the Trump campaign. They would leak this dossier to the press. The dossier, known widely at upper levels of State and the CIA to be false, implicated a Trump associate, one Carter Page. The Deep State people went to a FISA court (The Foreign International Surveillance Act of 1978 created FISA courts to spy on foreign actors working within the US) to get a warrant to surveil Mr. Page, and consequently the Trump operation, using the phony dossier to prove foreign collusion. The details are all still coming out, but there is a world of difference between hiring burglars to spy on your political enemies and knowingly, intentionally, bringing phony evidence to court to obtain a warrant to spy on your political enemies.
So here we have mirror-image scandals. In the 70’s the Republicans tried illegally to gain opposition research on the Democrats, and the Democrats now have been exposed in trying to gain opposition research on the Republicans. Plus ca change, right? The more things change, the more they stay the same. Again, though, my point: what is the effect of this unfolding scandal likely to be on financial markets?
Consider the timing. It took a little more than two years for Watergate to completely unfold, from burglary to resignation. At this writing, details seem to come out daily on the FISA court affair, and, like Watergate, it’s not a stretch to imagine that culpability will ultimately be proven right up to the Obama White House. But this will grind on a long time yet.
The economic situations couldn’t be more dissimilar, however. In the 70’s we were in a recession, evidenced by high unemployment (9% peak in 1975) and high inflation. The term stagflation comes from this time. There was a middle east oil embargo that began in ’73. There was a ’73 – ’74 stock market crash. Unemployment didn’t come down to 6% until June ’78. The top individual marginal tax rate was 70%, and the top corporate rate was 48%. (Anyone remember Gerald Ford’s WIN buttons? Whip Inflation Now. As though wearing a button would accomplish anything). And the Vietnam war raged on and on. The news was, to say the least, depressing.
This is a chart showing the S&P 500, a broad market index, for the full years of 1973-1974. It shows a typical U-shaped recession, with the stock market dropping, remaining bottomed out for several months, and then climbing once again.
All this contrasts with our current economic boom, set off by the Trump tax cuts. The pre- 1973-74 recession unemployment rate was 4.6%. We are about one point below that now, with black and Hispanic unemployment at a historic low – ever! The top marginal income tax rate is now 37%, and the top corporate rate is 21%.
This chart shows the S&P 500 from 2016 through Sept. 14th, 2018.
Is Watergate a Predictor for Today’s Markets?
What is my conclusion, then? Is the Watergate scandal any sort of predictor for us today? Short answer: No. Financial markets respond to financial news, and not political news so much. What moves markets is not the latest headline, but expectations of corporate profitability.
See related article: The Big Tax Code Revision
What were the expectations during the Nixon years? An Arab oil embargo, with shockwaves throughout the economy. Continuing high fuel prices. High inflation with no sign of abating. High marginal tax rates. A never-ending Asian war. Taken together, these stifled economic growth. Did Watergate have a deleterious effect on financial markets? Certainly on consumer sentiment, but not to a degree we can measure.
What are the expectations now? We are in the longest running bull market in history. The US is now a net energy exporter. Lowest taxes in generations, with the expectation that the Republicans will make the tax cuts permanent. Streamlined regulations. And the Treasury has taken in a record amount in taxes, cuts notwithstanding.
The fact that the bull market is the longest running in history makes a lot of observers nervous, meaning the end of it should be near. What are the headwinds? The Fed continues to raise interest rates to a more normal range. All borrowing will cost a little more: your auto loan, or your adjustable rate mortgage. Consumer spending always drives the economy, so if consumers have a little less to spend, rate rises will have the effect of tempering growth.
Are we at full employment, based on the statistics above? Meaning, if a business wants to expand, will it not be able to do so because there’s no one left to hire? This is a concern, certainly. If there are too few workers, then wages should be rising in the aggregate, as employers bid in the marketplace for workers. So far, wage increases have been small. The labor force participation rate hit the lowest measured since WWII during the Obama Administration. In other words, what we’re seeing now is something else that is hard to quantify – people who have left the workforce are now returning. That is why we haven’t seen much wage inflation with these low unemployment numbers.
So here is my conclusion: The scandals then and now have many fascinating similarities, but markets still move on expectations of corporate profitability. In the mid-70’s we were in a recession and the stock market was in a correction. Currently we’re still in a bull market, which looks like it has a little way to run yet. The FISA Court scandal is just picking up steam. It will go on for several years, doubtless. What effect will this have on your portfolio? I think ultimately, not a lot.
So to the investors who are reading this: don’t be swayed by headlines. Keep your head. Watch economic fundamentals. Good quality is still good quality, even if the price changes. Invest for the long term, knowing full well that bull markets correct themselves over time.
See related article: Don’t Get Distracted by Financial Headlines – Stick to Your Financial Plan
Please feel free to subscribe to our blog, so you’ll get notification when something new comes out. See all of our blog posts and video content on our website here: www.cameron-downing.com. Meanwhile, feel free to email: firstname.lastname@example.org.