Rising US political risk – all is not peachy in Washington

James McManus

read 3 min

Impeachment is the word of the week, with financial markets and investors facing heightened political risk on the other side of the Atlantic. While we remain positive about the outlook for the US economy and global growth, the growing sense of political unrest underlines the continued need for diversification.

Close up image of the American flag

Almost every day this week, financial markets woke up to a Trump-related headline. Whether about his potential ties to Russia, his firing of FBI director James Comey, or the web of interconnected stories spanning the two, investors are suddenly facing rising political risk in the US after a period of relative calm.

For the first time since President Trump took office, impeachment is being discussed by politicians on both sides of the US electoral divide.

How likely is Trump to be impeached?

The big question then is whether Trump is going to be impeached. The answer? Not likely at present – unless investigations uncover new information that significantly shifts the sentiment within the Republican party itself. For many Republicans, a Trump impeachment would be personally damaging, given their support for a president already tarnished with more scandal than most over his short tenure.

Critically, the Republican party currently controls both the House of Representatives (by 238 to 193) and Senate (by 52 to 46), meaning a large shift in sentiment would be needed to advance any impeachment motion.

Impeachment doesn’t equal the end of the road for Trump

In the history of US politics, only two presidents have been impeached: Bill Clinton and Andrew Johnson. However, the impeachment process is far from simple, and being impeached doesn’t necessarily result in the person concerned being removed from office.

In brief, the first stage to impeachment requires a relatively simple majority vote in the House of Representatives. The second stage however requires a trial in the Senate, where a two-thirds majority is needed for the removal from office. This second stage is much harder to complete, and in the case of both Clinton and Johnson, the Senate failed to reach a majority verdict.

So how could this affect financial markets?

Markets typically favour stable and coherent political leadership. Trump’s leadership style is often anything but – with his tendency for bold promises, contradictory statements, and early morning twitter commentary. However, optimism remains that the ‘dealmaker’ can deliver on some of his key commitments such as tax, healthcare and regulatory reform and infrastructure spending.

Trump’s election victory was a positive shock to financial markets, meaning his ability to deliver on promises has already been priced into some financial market assets. This clearly means an impeachment would be taken as negative news, not just because of the uncertainty it creates in Washington.

Nutmeg portfolios remain diversified

That said, the US economy was strong before Trump was elected and remains so today – growth in the second quarter is tracking at around 4%. At the same time, the global economy has been improving faster than investors expected.

While we’re still positive about the outlook for global growth in 2017, our Nutmeg portfolios remain highly diversified, and include assets that should help protect portfolio performance if uncertainty rises further, such as gold and government bonds.

Risk warning: As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.

James McManus
James joined Nutmeg in 2015 from Coutts & Co. He is responsible for leading the investment management, wealth services, and investment proposition teams at Nutmeg. An expert in exchange-traded funds (ETF), James is regularly quoted in the national and industry press on ETFs, investment funds and ESG investing, and was voted one of Private Asset Manager’s Top 40 under 40, five times between 2017-2021. James holds a BSc in International Business from Nottingham Business School, the CFA UK Investment Management Certificate, and the CFA Certificate in ESG Investing.

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