The Trump Trade could start looking more like a Trump Tantrum if the new U.S. administration's healthcare bill stalls in Congress, prompting worries on Wall Street and around the world about tax cuts and other measures aimed at promoting economic growth.
Investors are dialing back hopes that President Donald Trump will swiftly enact his agenda, with a Thursday vote on a healthcare bill a litmus test which could give stock investors another reason to sell.
"If the vote doesn’t pass, or is postponed, it will cast a lot of doubt on the Trump trades," influential bond investor Jeffrey Gundlach, chief executive at DoubleLine Capital told Reuters.
U.S. stocks rallied after the November presidential election, with the S&P 500 posting a string of record highs up to earlier this month, on bets that the pro-growth Trump agenda would be quickly pushed by a Republican Party with majorities in both chambers of Congress.
The S&P 500 ended slightly higher on Wednesday, the day before a floor vote on Trump's healthcare proposal scheduled in the House of Representatives.
On Tuesday, stocks had the biggest one-day drop since before Trump won the election, on concerns about opposition to the bill.
Investors extrapolated that a stalling bill could mean uphill battles for other Trump proposals. Trump and Republican congressional leaders appeared to be losing the battle to get enough support to pass it.
Any hint of further trouble for Trump's agenda, especially his proposed tax cut, could precipitate a stock market correction, said Byron Wien, veteran investor and vice chairman of Blackstone Advisory Partners.
“The fact that they are having trouble with (healthcare repeal) casts a shadow over the tax cut and the tax cut was supposed to be the principal fiscal stimulus for the improvement in real GDP," Wien said. "Without that improvement in GDP, earnings aren’t going to be there and the market is vulnerable."
Strategists have been cautioning for weeks that markets are pricing in a scenario where nothing goes wrong with Trump's agenda. Investors are paying $18.10 for every dollar in earnings expected on the S&P 500 over the next 12 months, near the most expensive U.S. stocks have been since 2004.
“The rally has been a great story but it hasn’t had real conviction behind it — a lot of people are uncomfortably long equities and I don’t think these pullbacks will surprise anyone,” Andrew Scott, head of Asia-Pacific flow strategy at Société Générale, told the Financial Times.
“I don’t think a delay to healthcare reform is worth much more than 1 per cent off the S&P, but when people were looking to sell, it gave them a reason,” Scott said.
While investors and strategists have said they do not see an immediate threat to the eight-year-old bull market, there is a risk of a 5-to-10 percent drop. Only a bear market, or a 20 percent decline, would put an end to the bull.
"It looked like a mini tantrum," said David Kotok, chief investment officer of Cumberland Advisors. "Trump has made the House vote his own now so he has a lot at stake. My guess it will pass the House. If not, markets will be shocked and it won't be pleasant."
Michael Arone, chief investment strategist at the US SPDR Business at State Street Global Advisors in New York said that it the healthcare bill fails, "a correction of 5 percent is not unreasonable given how far we’ve come in such a short period of time."
FOCUS ON LEGISLATION
Investors are now more focused on the actual mechanics of the legislative process, said Brian Daingerfield, Macro Strategist at NatWest Markets.
"I noticed this was the first day (on Tuesday) I was getting inquiries about the healthcare law and the vote count," Daingerfield said. Wall Street views the healthcare vote "as a test of Trump's ability to unify the party," he said. "It has a symbolic significance."
After the healthcare bill, the market will look for movement on tax and infrastructure. The president has said he wants the health bill passed by the mid-April Easter holiday and a schedule from the administration aims for tax reform being passed by August. Only then will they begin to tackle infrastructure spending.
"U.S. equities have been priced for perfection since the start of 2017 and (Tuesday) was a rude reminder that the legislative process is imperfect on even its best days," said in a research note Nicholas Colas, chief market strategist at Convergex, a global brokerage company based in New York.
Meanwhile, some investors argued that a decline was overdue. “What is not normal is that we hadn’t had a correction in four months,” Rebecca Patterson, chief investment officer at Bessemer Trust, pointed out to the Financial Times.
“I always prefer equity markets to go up, but when you are in a medium-term bull market it is normal to have pullbacks and I think those corrections can be healthy,” she said. “It does not necessarily mean the good times are over.”
(Newsmax wires services contributed to this report).
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