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::: Market sentiment during Watergate shows how stocks might react to Trump
By Mark Hulbert | May 19, 2017

Investors were slow to grasp scandal’s significance

Impeachment is not good for stocks. I would have thought that it’s not necessary to point this out, but I’m clearly wrong.

A cavalier attitude towards impeachment has emerged both among the newsletters I monitor as well as on financial radio and TV — as if we are dealing with nothing more serious than someone getting fired on “The Apprentice.”

To be sure, the stock market on Wednesday experienced its worst one-day decline since last September, and concerns about the fate of the Trump administration were widely cited as a cause. But the stock market quickly found its footing on Thursday. And the several dozen market timers I monitor who focus on the broad market (as opposed to more narrow sectors) are slightly more bullish today than they were at the beginning of the week.

Dennis Gartman, editor and publisher of the Gartman Letter, describes this cavalier attitude as “utter and complete nonsense.” In a communication to clients on Thursday morning, he compared the current White House crisis to what former President Richard Nixon faced during the Watergate scandal:

“We are not dealing here with some tin-pot dictator in Venezuela, but we are instead dealing here with the President of the United States who finds himself in the sites of Democrats and Republicans now openly speaking about impeachment.,” Gartman wrote. “This is not easily dismissed, and we must remember that when Watergate first broke it was relegated to the very back pages of the first section of the nation’s major newspapers. It was not front page news for months and it took a year or more before the entire process ran out with Mr. Nixon’s resignation. Stocks sold off all the while.”

To illustrate Gartman’s point, I turned to the only measure of market sentiment that existed at that time. I’m referring to the Investors Intelligence “Advisory Sentiment Index,” which has been calculated since 1963. That index shows that it took months for investment advisers — and, by extension, individual investors — to accept the bearish implications of the Watergate crisis.

Take a good look at the chart, below, of the Investors Intelligence sentiment index, which covers the period beginning with the Watergate break-in on Jun. 17, 1972, and lasting until Nixon’s resignation on Aug. 8, 1974. Over that time, the S&P 500 SPX, +0.37% tumbled 23.7%.



Notice that investors became more bullish over the first six months after the Watergate break-in. In fact, by December 1972, a few weeks after Nixon’s landslide re-election, 85% of advisers who were either outright bullish or bearish were in the bullish camp. By the time Nixon resigned, the comparable percentage had dropped to 29%.

This is a textbook illustration of what contrarian analysts sometimes term “descending a slope of hope.”

To be sure, Donald Trump is capable of anything. If he senses that a long drawn-out impeachment saga has begun, he could very well decide to short-circuit the process by resigning. Jeremy Siegel, the Wharton finance professor and author of the investment classic “Stocks for the Long Run,” says the Dow Jones Industrial Average DJIA, +0.27% might rallya thousand points if Trump steps down. But if Trump instead circles the wagons and fights the process, as Nixon did, it’s harder to be sanguine about stocks’ prospects over the short- and intermediate terms.

http://www.marketwatch.com/story/market-sentiment-during-watergate-shows-how-stocks-might-react-to-trump-2017-05-19

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