Investors eye impeachment

Market cloud

The stock market faces a period of prolonged volatility as the impeachment process moves to the United States Senate.

Barring the unexpected - such as a surprise resignation by President Clinton - a Senate trial is expected to put a lid on stock prices.

Moreover, many foreign investors may consider exiting some US markets or reducing their holdings, says Larry Wachtel, a vice president of Prudential Securities Inc. in New York.

Overseas investors, in particular, value political stability, he says. At the very least, impeachment "is an overhanging cloud" on the market, Mr. Wachtel says.

Still, a downward tug on markets should lift once the Senate finishes its trial.

Euphoria may follow the Senate

Indeed, an end to the political drama could generate some euphoria propelling stocks higher, followed by a period of stability.

Many market watchers believe investors should "stay the course" with their own financial plan, regardless of what happens to the president.

Many investors, however, have already lightened up their stock holdings. The Dow Jones Industrial Average has fallen some 300 points since mid-November, a period corresponding to the heightened political turmoil surrounding impeachment.

The stock market likes "stability and certainty," says James Stack, editor of InvesTech, a financial newsletter published in Whitefish, Mont. "Impeachment can't help but be a negative impact on the market."

The stock market acts as a "discounting mechanism," says Rao Chalasani, chief strategist for investment house Everen Securities in Chicago. To that extent, the market had discounted the impeachment action by early December, he says.

Impeachment by the full House was widely expected on Wall Street. But what remains unclear to investors is the nature and duration of action in the Senate.

If the deliberation proves bitter and lengthy, it could have "a negative impact" on stocks, Mr. Chalasani says.

Ironically, historical patterns peg 1999 as a year for solid market gains. Since 1940, markets have gained an average of 15 percent in the third year of a president's four-year term, mutual-fund experts say. There has not been one losing year in that third-year pattern since 1940.

But the historical pattern "could be off this year," says Mr. Stack.

One major reason for the historical gains, Stack says, is that recessions or economic downturns generally show up in the first or second year of a presidency, paving the way for a stock rally in the third and fourth years.

But under Mr. Clinton, there has been no recession. That means stock valuations are still high, despite several market corrections.

Still, Stack says, the market may have more of an impact on whether Clinton survives a Senate vote than vice versa.

Part of the president's political clout, Stack says, comes from the strong economy and resilient stock market. If stocks turn negative, that might dim Clinton's continuing appeal in the eyes of some undecided senators, Stack says.

Big differences from Watergate era

Few analysts believe the current crisis resembles the economic backdrop during the Watergate period, when the market slipped into deep trouble in 1973 and 1974.

Back then, Chalasani notes, an energy shortage drove inflation to disruptive highs for economies around the world.

Now, however, the economic fundamentals look good, Chalasani says.

Inflation is negligible; unemployment, low; consumer confidence, strong. And interest rates show little signs of rising.

If Clinton leaves, the team stays

Moreover, the current Washington economic team, including Treasury Secretary Robert Rubin and Federal Reserve Board Chairman Alan Greenspan, is expected to remain in office no matter what the outcome on Clinton.

Even if Clinton were to step down, the vice president-turned president, Al Gore, would continue his economic policies.