May 10th, 2017

The Watergate Template

Everybody seems to be talking about today. In the wake of Trump’s firing Jim Comey, head of the FBI, nearly every newscast is comparing the Tuesday Night Massacre with the Saturday Night Massacre of 1973 when Nixon fired independent special prosecutor Archibald Cox, which led to the resignations of Attorney General Elliot Richardson and Deputy Attorney General William Ruckelshaus on October 20, 1973, during the Watergate scandal.

But Stock Chartist was ahead of the curve as subscribers got a “heads-up” about the stock market implications of the emerging White House turmoil in their April 2 issue of the Weekly Recap Report. You can today read what they got … 5 weeks ago.
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The Watergate Template

Two weeks ago, in “Should We Sell Everything“, I offered up a view of the three previous corrections of any magnitude in the bull market we’ve had the benefit of enjoying since 2009 and concluded that since it takes several months for tops to form “all this talk about selling everything in anticipation of a correction that clearly is coming, at some time and at some point in the future is premature.”

Last week’s Recap Report entitled “Politics and the Stock Market” looked at stock market behavior in two previous Presidential Crises and concluded that “The big grey cloud on the horizon is the impact the charged political situation will have on Trump and his anticipated programs.” Today we drill down into the 1972-73 Nixon/Watergate market (click here for a chronology) in the chart below as template of what we might be able to expect should Trump’s Russia problems escalate to such a degree that it actually begins impacting the market (click image to enlarge):

Nixon Impeachment - 2

I know it’s blinding but let me walk you through it. The chart depicts the August 1972-December 1973 S&P 500 Index. This is important because the market advanced 6% between Nixon’s Election and January 11, 1973. The massive 48% crash (third steepest in history) began when the market peaked on January 11, a couple of days after the trial of the Watergate Seven burglars presided over by Judge Sirica began on January 8, 1973; it ended in October-December 1974.

  • At the top, the Market Momentum Meter’s values (e.g., 1234, 12936, 21605) and colors (green, yellow, red)
  • Some of the milestones in the Watergate saga
  • The S&P 500 Index and moving averages

The Watergate took weeks and months to unfold. It involved criminal prosecutions, Congressional inquiries and special prosecutors. It involved a cover-up that was discovered and disclosed, indictments and resignations and immunities granted. Calls for Nixon to resign began in January 1974 (click here for chronology), a House Judiciary Committee began impeachment proceedings on February 6, 1974 with demands for the tapes to be turned over. It continued until August 8 when Nixon announced his resignation.

Market upside momentum slowed dramatically as “breaking news” about the break-in continuously flooded the media so the moving averages began pivoting, first moving horizontally and then turning down. The Meter didn’t turned consistently Bearish Red until mid-April after the Index had already declined 6% below the peak to 110. Even with all the news, the market closed the 1973 with a -17.4% drop. But the meter was solidly Red with a Perfectly Bearish value of 21605. The market dropped another -36% before touching the low of 62.8 on October 3, 1974!

Why dredge up this sad chapter in Presidential history? Because it serves as a template for how investors might react and how the stock market might behave, should questions and inquiries about Trump and his staff’s Russian ties continue and evolve into indictable criminal activity. While the Nixon saga stretched over months, the Trump replay will be in fast-motion Internet time.

Just as athletes or first responders, for example, practice, run drills and watch game replays so as to be prepared for any contingency, stock market participants need to practice and be prepared. No one can predict where we’ll be a year from now. The indexes of confidence are hitting highs for over a decade, if not all time highs internationally and domestically in business, consumers and housing. And yet, like in 1973-74, politics overwhelm economic and market euphoria.

Being forearmed is being forewarned. This is not a prediction of a market crash but rather, using today’s popular jargon, it’s an “alternate narrative” of what did happen and could happen that we need to be ready for. We shouldn’t sell everything today because, if we and Trump are lucky, all this could blow over, the economy will continue plugging along, and the stock market will cross the mid-point trendline in the Reversion to the Mean channel and become support. I suggest, however, that you print the chart above, have it handy nearby, plot emerging events against what did happen and take action as needed depending on your tolerance for risk.

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