The Stock Market

There are many factors that affect the stock market. So many, in fact, that it is immeasurable. There are financial factors, such as corporate profits and interest rates which affect the market, and other factors. Factors such as involvement in war, foreign affairs, trade agreements, and political events. How do these other factors affect the stock market when there is seemingly no connection to finance?
Many of these other matters affect the economy, such as trade policy, which in turn affect corporate investment. When a policy is implemented which affects the economy, corporations react accordingly. This reaction can improve the financial position of companies, or it can make it worse. Investors will in turn react to these changes by selling stock or buying into the market.
Many times, investors will react to policies and events before there is a corporate reaction. If an investor thinks that a certain event will affect corporate profits, he may react before the corporations do--in order to limit losses or to gain more. This event may not have any merit as one that would affect the market, but the investor will react on a "hunch". Let’s examine the Clinton/Lewinsky scandal in discussing this matter.
Did the Clinton/Lewinsky scandal have an effect on the stock market? There may not be a clear answer to this question. The popularity of the scandal in the news may have caused some investors to react, but how? Did they sell off their stock, and if so, why?
Some investors may have thought that since perjury and obstruction of justice may be impeachable offenses, a presidential impeachment would be in the near future. The president supports and opposes many different economic policies. If this president is impeached, then certain policies may no longer be favored by the new president. Of course the new president would be Al Gore, who would support and oppose the same policies, but he may not have the congressional support which Clinton enjoyed to implement these policies.
Perhaps an investor thought that the scandal would cause presidential support to deteriorate in congress, limiting the president’s power. This could have been thought of as a hindrance to the president’s ability to impose economic and trade policies which affect corporate profits.
The scandal could have had psychological effects on investors, causing them to back out of the market. There may have been a reduced interest in investing due to the widespread media coverage of the scandal. It is inevitable that some investors thought of numerous consequences of the scandal which may affect the market, and acted on a whim.
There are many possibilities of investor reaction to the scandal. But did these reactions dramatically affect the stock market? Let’s examine the stock market in 1998 and events in the scandal to try to determine the answer.
The 1998 stock market has been characterized as a volatile market with rapid changes and record highs. The Clinton/Lewinsky scandal surfaced around the beginning of 1998. After this point, the Dow Jones Industrial Average went straight up towards record highs, with no significant corrections until April.
On April 1, 1998, Judge Susan Webber Wright dismissed the Paula Jones case. Grand Jury testimony continued throughout the month. On April 18, US News and World Report says retired Secret Service officer Louis Fox testified before the grand jury that during a visit by Lewinsky to the White House in the fall of 1995, Clinton told him, "Close the door. She’ll be in here for a while." This was a significant revelation in the saga, because the agent was the first credible witness to suggest presidential wrongdoing. However, at this point in time, the stock market has just about leveled off for about a month. The next downturn would come in June, followed by a significant month-long downturn from July to August.
Grand Jury testimony continued throughout June with no significant events, except for the beginning of Linda Tripp’s testimony on June 30. Tripp’s testimony continues into the beginning of July. On July 28, a full immunity agreement was worked out for Monica Lewinsky. Throughout the month of July, there is a significant downturn in the stock market, which drops over 1200 points by the end of the month. This downturn, however, has been attributed to the turmoil in Asian markets.