The stock markets swooned to the upside in the wake of President Donald Trump’s surprise ascension to the presidency. Double-digit percentage gains were in place in just a few months, broadly dispersed across the major U.S. indices, and with the Standard and Poor’s 500 Stock Index up about 10 percent.
The reasoning went, and still goes, that Trump’s policies, with speedy passage of a friendly(ish) Republican Congress, would help boost corporate bottom lines. After all, tax cuts mean margin improvement even with all else being equal in terms of business environments. Consumer spending remains resilient. And interest rates, palatable even if coming off multi-year lows, would boost the financial sector and even draw capital from abroad in search of returns.
That was all the conventional wisdom. The problem lies where speculation meets reality. Legislation is a lot harder to get done than maybe some had thought. Putting aside the swirling issues of ties to Russia, hacking, tax returns and so on, Trump and his team are spending time, energy and effort rustling up support for the health care initiative that will soon be on the table.
What happens if expectations fall short or the struggle is harder than it might otherwise have been? The read across might be that passing business-friendly reform will be a new hurdle. Stocks sold off sharply in the U.S. as a result. They are mixed at this writing, at mid-day on Wednesday (March 22), with the Dow down ever so slightly and the Standard and Poor’s Index flat. That’s not exactly a full-throated investment vote of confidence.
Another leg down was seen in Asia, overnight, where the Nikkei was off 2 percent and the Hang Seng sank 1 percent, while China’s market, relatively resilient, was down a mere 50 basis points. The old saying goes that when the U.S. sneezes (or China sneezes, or name your own favorite bellwether), the rest of the world catches a cold.
That may be happening here, as Reuters stated on Wednesday that the move away from equities and toward “safer” assets such as gold may be coming in tandem with new concerns over how Trump’s agenda may be realized and embraced or left unfinished. For the United States, valuation of the equity markets raise fresh concerns and helps boost investment in currencies such as the yen.
It may just be a wobble, or it may be a toe-dip before the leg down. But the Trump rally, built on corporate hope and optimism, can be undone on a little less hope and a little less optimism. The Affordable Care replacement drama must play out before corporate tax reform takes the stage, and the waiting in the wings may be fraught with anticipation, and not the kind that will buoy stocks.