The "Trump Rally" hit what many pundits are calling a "speed bump" yesterday. While a pullback has been expected by just about everyone in the game, the speed at which the vehicle hit the bump still managed to send passengers flying in all directions. The Dow fell more than 235 points, notching the first 1% decline since October 11. And in short, the market experienced the worst day of calendar year 2017 so far.
Although there were several issues in play yesterday, at the forefront was the worry that the pro-growth/business policies of the Trump administration could get sidetracked by politics in Washington.
If you will recall, the primary driver of the "Trump Bump," which has carried the S&P 500 up nearly 15% from the November low through March 1, has been the expectation that Trump and the Republican-controlled Congress would focus on tax reform, cutting regulations, and stimulating the economy.
However, as I've written a time or two, at some point, the expectations of better days ahead would need to become economic reality and any "bumps in the road" could become problematic for stock market bulls if the policies were delayed. And the bottom line is this is exactly what traders and their computers were fretting about yesterday.
The immediate fear is that House Republicans may not be able to gather the votes they need this week to dismantle Obamacare. The "repeal and replace" process is slated to begin on Thursday but talk of infighting within the GOP about the makeup of the bill is causing consternation.
The problem is that Republicans have put the elimination of the Affordable Care Act in front of the pro-growth items on the Trump agenda such as tax reform and stimulus spending plans. Cutting to the chase, this means that tax reform can't be addressed until the healthcare issue is taken care of.
Prior to Tuesday, the expectation in the market was for tax reform to be addressed late in Q3. But with the Freedom Caucus talking about blocking passage of the GOP healthcare bill until/unless they get what they want, well, traders fear that the issue of tax reform may be pushed farther down the road.
Now mix in the action in the oil pits (crude looks to be threatening to test its recent lows) and the declines seen in the dollar and bond yields, and you have a reason for the fast money types to hit the sell button early and often.
Couple all of the above with elevated valuations and a market that hasn't seen any real volatility for an extended length of time and yesterday is what you get - a flush to the downside with traders scurrying to all do the exact same thing at the exact same time.
The question, of course, is will yesterday's dance to the downside continue? Only time will tell, of course. But the good news is the vote on the GOP healthcare plan is slated to take place tomorrow. Thus, if the Republicans can keep it together and get the thing approved, the argument can be made that yesterday's decline may indeed wind up being just a speed bump on the road to higher stock prices.
However, if the vote is delayed (or worse), look for a lot of talk about business as usual in D.C. and more fear that the important issues such as stimulus spending and tax reform will fail to be addressed. And if this occurs, the red numbers are likely to persist for a while.
Thought For The Day:
"Know what's right, avoid what's wrong." -Lout Holtz
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of the U.S. Economy
2. The State of Trump Administration Policies
3. The State of the Fed's Next Move
4. The State of Global Central Bank Policies (Think ECB pulling back on QE)
Wishing you green screens and all the best for a great day,
David D. Moenning
Chief Investment Officer
Sowell Management Services
Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.
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