Published March 24, 2017
The post-election rally has been built on President Trump’s ability to implement his tax reform and infrastructure building agenda, with heavy emphasis on the tax reform. Recent events have caused the market to get nervous about the ability of the Trump agenda to be carried out. First, tax reform was not pursued as the primary objective with Congress. Instead, healthcare reform, specifically reforming the Affordable Care Act aka Obamacare, became the first order of business. This put the success of passing the healthcare reform as a first test of Trump’s ability to get his agenda through Congress. Of course, Congress has spent several years proclaiming their dislike for the law, voting innumerable times to repeal it in a litany of demonstration votes. Pushing this reform through should be easy then, no?
It has been anything but easy. The existing law contains a number of moving parts such that pulling on one apparently loose thread only serves to tighten another. The inter-dependencies of the law have made it very difficult to create something that everyone views as better. As the week went on it became clear that reform of the law could fail to pass the House of Representatives. Would the failure to pass the law be viewed as a litmus test for Trump’s ability to enact his tax reform agenda? Markets thought so at times during the week leading to the first -1% selloff for the S&P 500 in over six months, a historically long time of market calm.
Chart 1: Market rally takes a break
To be fair, healthcare reform dynamics and tax reform dynamics will be different. Each effort could presumably be broken down into smaller pieces to allow for more targeted law reform. Regardless, the honeymoon period for Trump and the stock market has come to an end clearly this week. It occurs just as we turn the calendar to April and earnings season returns. Those earnings will now need to justify the move higher post-election.
Investors headed toward President Trump’s first showdown with Congress this week as the healthcare reform bill to repeal/replace “Obamacare” headed for a vote. Monday saw a slight -0.2% dip as oil prices continued to encounter pressure and investors were cautious ahead of the healthcare voting later in the week. Stocks found their first heavy selling pressure of the year and worst loss in over six months in Tuesday’s trade. Investors appeared to doubt that the healthcare reform act would find enough votes leading to a bout of profit-taking in recent areas of strength, notably financials and steel companies. Smallcaps were clobbered losing almost -3%. Stocks staged a tepid rebound Wednesday though consumer powerhouse Nike (NKE) fell -7% on its first earnings disappointment in a long time. The awaited vote on healthcare reform was pushed out of its Thursday slot as President Trump and Congressional leader Paul Ryan struggled to find votes to pass the bill. Stocks closed the session flat with car maker Ford (F) warning that upcoming earnings will notably miss estimates. Last minute jockeying to save the healthcare bill failed Friday causing stocks to roll downward in the afternoon before closing the day with a slender -0.1% move after being higher earlier in the day.
For the week, the S&P 500 lost -1.34% while the Nasdaq 100 (QQQ) dipped -0.80%. Smallcaps dumped -2.59% and now hold a slight loss for the year.
Warm wishes and until next week.