Insightful News


We are an addiction for those who love reading.


Insightful News

How Far Can the Trump Selloff Go?


After treading water for weeks amid doubts about President Donald Trump’s ability to carry out his pro-business agenda, the stock market cracked on Wednesday, recording its worst day of 2017.

The Dow Jones Industrial Average fell 373 points, or 1.8%, to 20607, while safe-haven Treasury bonds rallied and the dollar gave up all of its post election gains. The S&P 500 declined 1.8%, and the

Nasdaq
Co

mposite dropped 2.6%.

Stocks, buoyed by strong economic and profit growth, have been the lone market to retain its gains in recent weeks. Investors had been banking on President Trump and the Republican-led Congress delivering on tax reform and deregulation. What happens if trouble at the White House sends those hopes crashing?

To answer that, investors must disentangle how much of the rally in stocks has been due to an improvement in the market’s fundamentals, and how much of it is due to enthusiasm for the Republican’s agenda. Doing so suggest there is a limit to the potential losses, but that the losses could be substantial nonetheless.

Wednesday was, for the first time in a while, a bad day for financial markets. Reports that Mr. Trump in February allegedly asked then-FBI Director

James Comey

to back off the investigation of former national security adviser

Michael Flynn

upended the laissez-faire view many investors have taken of a tumultuous presidency. Stocks fell sharply, the dollar weakened and Treasury yields declined.

“The mood in D.C. is very different today than in the past couple of months,” wrote Strategas Research Partners political analyst

Daniel Clifton

in a note to clients Wednesday. “We are heading into a larger period of uncertainty, one in which there is a growing doubt Trump will be president of the United States in 2018.”

Mr. Trump’s fate is far from known, but more likely is that Republicans will struggle to pass tax overhaul. The Republican agenda, says Renaissance Macro Research policy analyst

Kim Wallace,

“has gone by the wayside until you get basic questions answered” about Mr. Trump’s actions with Mr. Comey and with Russian officials.

The foreign exchange and bond markets have reflected skepticism over Mr. Trump’s ability to boost U.S. economic growth for some time. The dollar is below where it was on election day, and Treasury yields are below their March highs. Stocks are different: The S&P 500 closed at a new high on Monday, and even after Wednesday’s setback was 10% higher than it was on election day.

The stock market’s performance, until Wednesday, was due in part to improving global fundamentals. The other driver was expectations of tax cuts and easier regulation boosting earnings.

You can separate the two by comparing the increase in profits versus the increase in valuation.

Profits are looking better. Analysts estimates for earnings at companies in the S&P 500 over the next year have increased 5% compared with where they were on election day, according to FactSet.

The remainder of the S&P’s gain came from steeper valuations—the index now trades at about 17.2 times expected earnings versus a forward price/earnings ratio of 16.4 on election day. If investors completely lose confidence in the Republican’s ability to deliver, this part of the gain could be wiped out. That would mean a roughly 5% decline from here.

That is a modest loss, but investors should remember that stock market selloffs are rarely that neat.

Write to Justin Lahart at justin.lahart@wsj.com



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *