The impeachment battle is a political earthquake. Here's what it means for stocks

New York(CNN Business) The American economy's chances of entering a recession are growing. The US-China trade war is still raging. And now President Donald Trump faces the specter of impeachment.

These are tricky times for investors.

At a minimum, the launch of a formal impeachment inquiry adds to the mounting uncertainties hovering above markets.

And no matter how far the impeachment proceedings go, this is yet one more question mark clouding the outlook for the longest economic expansion and the longest bull market in American history.

"We don't have a playbook for this," said Nicholas Colas, co-founder of DataTrek Research.

Although the start of impeachment proceedings is a political earthquake in Washington, the consequences for Wall Street could be far be less profound. Investors, for now, seem willing to view it as a mere sideshow.

"The market will see through any short-term challenges and realize it's more political theater than anything that will fundamentally impact the economy," said Daryl Jones, director of research at Hedgeye Risk Management.

Investors are hardly freaking out. US stocks retreated on Tuesday, but impeachment was just one of several factors dragging the market lower. And stocks moved mostly higher on Wednesday even after the White House released a transcript that showed Trump pushed Ukraine to investigate former Vice President Joe Biden.

So far, markets are betting the political drama won't alter the fundamentals: corporate profits and economic growth. That's especially because investors know there is a very high threshold to remove a president from office. Not only would the House have to vote to impeach Trump, but two-thirds of the Senate would need to convict him.

"I don't think impeachment proceedings will spill over into the real economy," said Jones.

What does this mean for the trade war?

But that thinking could change if the latest political scandal shifts the chances of a US-China trade agreement, rattles American consumers or improves the odds of a less market-friendly president taking the White House in 2021.

The trade war remains Wall Street's biggest fear.

The unprecedented tariff battle between the United States and China has created vast uncertainty, pressured manufacturing, forced companies to overhaul supply chains and raised costs for businesses and consumers. The trade war alone could spark a recession in the United States.

Impeachment could prove to be a negative for Wall Street if it lowers the chances of a trade agreement, or leads to an escalation of tensions. If Beijing believes the White House has been damaged by the current scandal, it could decide to sit back and wait until after the 2020 election.

"How much will China be willing to negotiate if they see a weakened president?" asked Art Hogan, chief market strategist at National Securities Corporation.

Chris Krueger, managing director at the Cowen Washington Research Group, warned that the impeachment scandal could distract the White House from trade talks.

"Perhaps Trump can't/won't engage in the high stakes diplomacy to break the US-China impasse," Krueger wrote in a note to clients on Tuesday.

Others argue that the new scandal could force Trump to look for a big win before the election by reaching an historic trade agreement with China.

That, of course, would be a huge positive for stocks by removing one of the biggest negatives holding back the economy.

Will consumer spending remain strong?

Beyond China, investors will be on high-alert for any sign that the political drama in Washington might slow the economy.

The most obvious way that could happen would be by denting consumer spending, which has largely remained resilient throughout the trade war and other recent political controversies.

"A crescendo of bad news can move an economy driven by the consumer," said Hogan. "Is this something that causes people to put off buying that sweater, fridge or car?"

Meanwhile, the impeachment fight adds to policy uncertainty ahead of the 2020 election.

One major question is whether it will help or hurt Trump's reelection chances. Investors could grow nervous if the scandal increases the chances of a less business-friendly president in 2021.

"The market has some misgivings about a President Warren or Sanders," said Colas. "The market is probably okay with a President Biden."

Markets boomed in the late '90s

History offers limited examples of how the market performs during impeachment proceedings. And those examples, of course, didn't happen in the middle of a trade war.

For instance, the US stock market was already mired in a bear market in 1974, the year President Richard Nixon resigned to avoid his own impeachment and likely conviction. At the time, the economy was crippled by the OPEC oil embargo and high inflation. The political crisis did not help.

More recently, the S&P 500 advanced 28% between the start of the Monica Lewinsky scandal in January 1998 and President Bill Clinton's acquittal by the Senate in February 1999, according to Bespoke Investment Group.

The stock market did plunge nearly 20% in the summer of 1998, but that tumble was driven by the Russian debt crisis and the near-collapse of hedge fund Long-Term Capital Management. The S&P 500 recovered from that scare and ended up hitting new highs months before Clinton was acquitted.

Sam Stovall, chief investment strategist at CFRA, thinks the market will survive this political drama, too.

"While the current crisis will certainly add to the market's wall of worry," Stovall wrote in an email, "we don't think it will lead to recession and therefore will not result in a new bear market."