May 11, 2017 / 2:03 PM / 3 months ago

Cox: Nixon nostalgia missing from stock market

Protesters from the "Support, Don't Punish" campaign group wear masks depicting former US President Richard Nixon to demonstrate against the criminalisation of drug use in London June 26, 2013.Neil Hall

NEW YORK (Reuters Breakingviews) - Sometime around the age of six, I remember wishing my name was Archibald, or Archie for short. I have never understood why - I didn't even like the Archie comics. With President Donald Trump's firing of FBI Director James Comey, I now have a theory. Archibald Cox (no relation) was the special prosecutor who stood up to Richard Nixon over the Watergate scandal, which provided nightly dinner-table conversation at my home back in 1973.

Comey's abrupt dismissal has sparked something between nausea and nostalgia among Americans worried about a constitutional crisis akin to the one that ultimately led to Nixon's resignation. "This is a remarkable moment," Bob Woodward, the reporter who with Carl Bernstein covered the Watergate Hotel break-in from which the scandal unfolded, told MSNBC. John Dean, the former White House counsel who did prison time for his role in covering up Watergate, told the New Yorker: "Every move they make keeps signaling ‘cover-up.’"

Journalists, Watergate nerds and Democrats may be overdoing comparisons between Trump’s sacking of Comey and the so-called "Saturday Night Massacre" of October 1973. Then, Nixon ordered Cox's firing, which led to the resignations of the attorney general and his deputy when they refused to comply. But prominent Republicans have also expressed misgivings about Comey's ouster, particularly its timing in the midst of an FBI probe into possible connections between Russian operatives and Trump campaign staff.

Yet one constituency has remained notably quiet about the whole affair: the stock market. There are myriad reasons for investors to fret over the Comey dustup, as my colleague Gina Chon has pointed out. Nevertheless, the Dow Jones Industrial Average barely budged on Wednesday, losing just a fraction of a point, while the S&P 500 Index notched up a similarly negligible gain for the day. Both have managed to maintain their 11 percent bumps since the election six months ago.

Investors, it seems, don't think history is repeating itself. From the start of the acute phase of the Watergate scandal to Nixon's decision to depart the Oval Office, the United States endured one of the worst bear markets in history. The Dow stood at a little under 1,000 in early February 1973, just before Congress voted to create a select committee to look into the Nixon camp's activities during the 1972 election.

Toward the end of 1974, after the president was forced to quit in August that year, the average had tumbled to a nadir below 600 points for a loss of over 40 percent, according to Thomson Reuters Eikon data. The benchmark – which comprised some of the same stocks as today, including General Electric, Exxon and Procter & Gamble – took until early 1976 to regain the 1,000 mark.

Nixon's misdeeds were not the sole reason for the decline in the stock market. America's decision in 1971 to withdraw from the Bretton Woods Accord, ending the convertibility of the dollar to gold, sent the global financial system into a tizzy. Stocks in the United Kingdom and elsewhere suffered even worse declines than those on Wall Street, for instance.

And in the midst of the Watergate mess in October 1973, Syria and Egypt launched a surprise attack on Israel, kicking off the Yom Kippur War. In retaliation for American support of Israel in the conflict OPEC launched an embargo and raised prices, delivering a double whammy to a developed world already coping with financial instability and inflation.

Even so, Nixon's travails mattered. Aside from uncertainty over the presidential endgame, it's arguable he and his administration were distracted and, as a result, failed to provide the caliber of leadership for Western nations that might otherwise have been possible. In turn, that probably worsened the fallout from the oil embargo and financial-market turmoil.

One concern with the Comey affair is that it will similarly distract Trump from making good on his campaign promises, such as reforming the healthcare system and tax code. Optimism about the latter has been a significant accelerant for stock prices since Election Day. A president bogged down in Watergate-like constitutional malarkey and openly warring with members of the House and Senate will struggle to deliver a bill offering even modest tax cuts – not to mention deftly handle a full-blown international or military crisis.

After a flurry of enthusiasm following Trump's victory in November, stock investors have been in wait-and-see mode. The financial system is more resilient than it was during Watergate and oil prices are low. The Comey episode can perhaps be viewed as a containable political tempest. With corporate profitability near its zenith and stock valuation ratios near historical highs, however, that's an assessment that ignores the risk it develops into something a lot less benign.

Breakingviews

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