The markets are predicting that Trump will be impeached but not removed from office

Traders are betting President Donald Trump will become the third president in American history to be impeached.

Posted Updated

Matt Egan
, CNN Business
CNN — Traders are betting President Donald Trump will become the third president in American history to be impeached.

The odds of Trump's impeachment during his first term by the US House of Representatives spiked above 60% on Tuesday on prediction market PredictIt. That's up from just 24% before reports surfaced on September 18 about whistleblower allegations.

Traders on the platform currently see only an 18% chance that the president will be removed from office by the Republican-controlled US Senate.

Investors use prediction markets to get a real-time barometer on the likelihood of certain political events, everything from Brexit and the 2020 election to impeachment. And unlike polls, which operate with a lag, the prediction markets respond instantly as developments unfold.

"The odds can change after literally a phrase or a tweet. To investors, it's potentially hugely valuable," said Flip Pidot, senior market analyst at PredictIt.

The impeachment fight has dramatically ramped up activity on PredictIt. Hundreds of thousands of trades are made daily in the most active impeachment market, up from tens of thousands per day prior to the recent scandal.

"We've seen quite an uptick," Pidot said.

Traders on PredictIt can buy shares for or against an event taking place. Those shares can then be traded, ideally by selling them for a higher price once an outcome looks more certain. Due to regulatory restrictions, no more than 5,000 traders are allowed to take a position in a given contract at a time. And those traders are limited to $850 per position.

Trump: Markets would 'crash'

As of now, the prediction market for impeachment suggests Trump's political fortunes could be in peril, although the current betting is that he's unlikely to be removed from office.

Financial markets have been mostly unfazed by the historic impeachment fight now taking shape in Washington. Investors seem to be betting that this will remain a political sideshow, not an event that significantly alters the outlook for economic growth and corporate profits.

Trump, however, warned on Thursday that there could be severe consequences for the stock market.

"If they actually did this the markets would crash," Trump said on Twitter in response to a tweet about the impeachment inquiry in the House of Representatives.

Analysts don't think that's the case.

"Markets do not crash because of impeachment, they crash because of recessions, which are usually caused by a policy mistake," said Art Hogan, chief market strategist at National Securities Corporation.

History offers little guidance, since impeachments are rare.

Hogan noted the recession of the early 1970s had "nothing to do with" the Watergate scandal that forced President Richard Nixon to resign in 1974.

Likewise, the bull market continued throughout the impeachment of President Bill Clinton in 1998, although that rally was briefly derailed by the implosion of hedge fund Long-Term Capital Management and the Russian debt crisis that same year.

The only other impeachment, of President Andrew Johnson, took place in 1868.

"The market follows the economy, not who is in the White House," Hogan said.

Trade war, 2020 election

The economic outlook could be altered by shifts in the US-China trade war. It remains unclear whether the threat of impeachment will increase or decrease chances that the two nations reach a trade agreement that would remove a near-term threat to the economy.

"For now, markets appear to be more focused on President Trump's foreign trade policy than his risk of impeachment," UBS strategists wrote in a note to clients on Thursday. "The wild card here is how this may impact White House decisions on trade negotiations."

The impeachment battle could also have an affect on the 2020 election. Investors could react negatively at the prospect of of a less business-friendly president in the White House.

Senator Elizabeth Warren's chance of being the Democratic presidential nominee has spiked to 50% on PredictIt, from about 30% a month ago. Former Vice President Joe Biden, on the other hand, has seen his odds dip to 20% from 27%.

"The market could live with Joe Biden. But even the hint of a Warren presidency would have to be unnverving for the market," said Greg Valliere, chief US strategist at AGF.

How investors use prediction markets

Some Wall Street firms use PredictIt to scope out the political landscape before making investment recommendations and decisions. Goldman Sachs, for instance, recently published a client report that included a chart based on PredictIt's predictions on which party will control the White House and Congress in 2020.

Brokerage firm BTIG has highlighted Warren's "emerging" frontrunner status in the prediction markets for the Democratic presidential race to suggest China may be eager to reach an agreement before the election.

PredictIt said it has been approached by hedge funds and other Wall Street firms that use the platform as an input for making investment decisions. Those firms have sought to purchase PredictIt's internal data, though the predictions platform said it does not sell the data. It does, however, provide it to universities researching how markets forecast events.

Investors must remember that prediction markets, like polls, are not crystal balls. They can be wrong, or premature.

Traders on PredictIt notably did not accurately call two of the biggest political events in recent memory: Brexit and the 2016 presidential election.

"There have been black swans that caught everyone off guard," PredictIt's Pidot said.

But he added that unlike polls, PredictIt forces people to put their money where their mouth is.

"The benefit to real money is you're less likely to lie," Pidot said. It'll cost you money to lie."

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