It was good while it lasted.
Almost seven months to the day President Donald Trump took office, his “Make America Great Again” agenda has been eclipsed by political turmoil that is threatening to unravel a record-breaking rally in stocks.
After a chaotic few days that culminated with the resignation of White House strategist Stephen Bannon, doubts over whether the embattled president will be able to deliver on his business-friendly policies have started to seep into the market.
“The country is very divided. The Congress is at war with the president,” said Ian Winer, head of the equities division at Wedbush Securities. “This week opened up the possibility that nothing will happen [on the policy front] throughout the next four years.”
Much of the market’s gains since Trump’s election win have been underpinned by hopes that the president will push through tax cuts and roll back regulations that had hobbled U.S. corporations.
How Bannon's Departure Affects the White House
But that all changed as Trump’s combative style increasingly alienated those within his own party, making it more difficult for the president to secure legislative support for something as complex as tax reforms, said Brad McMillan, chief investment officer at Commonwealth Financial Network.
“I would not rule it out entirely, but I think the chances are pretty low at this point,” McMillan said. Any hope for a tax overhaul is now “dead and buried,” in his view.
Stocks closed lower on Friday, falling for a second straight week in another sign that investors’ confidence in Trump’s economic leadership may be floundering.
There are other bearish signals, too.
The Dow Jones Industrial Average DJIA, -0.35% and the Dow Transportation Average DJT, -0.62% are continuing to diverge, suggesting that stocks may be headed for a rough patch. In a robust market, benchmarks should move higher in tandem and serve to confirm each other, according to the Dow Theory.
After an extended period of calm, recent sessions have been punctuated by dramatic swings in the index.
As Frank Cappelleri, a technical strategist at Instinet LLC, points out, three of the seven 1% moves in the S&P 500 SPX, -0.18% this year occurred in the past few days, hinting at emotionally driven trades,
“The cluster of large moves, increased volatility and widening divergences between the S&P 500 and the smaller cap indexes have made the market environment appear more ominous in my opinion,” said Cappelleri.
Most market dips this year have been countered with resurgent demand for stocks, which had been forceful enough to push stocks to new highs. However, if similar buying does not materialize after this most recent drop, it will be a clear sign that “the market’s character has changed,” he said.
Still, there are die-hard bulls who refuse to throw in the towel.
Andrew Adams, market strategist at Raymond James, remains steadfast in his belief that the market’s upward trajectory is on track.
“Our secular bull market thesis remains intact despite the action over the last two weeks. The current dip is not unexpected at all given the historically-long duration of the run we’ve been on since the election and the weakening under the surface of the market the last few weeks,” said Adams.
The strategist, in fact, believes politics are a convenient scapegoat for bears and investors should not read too much in the market’s recent stumble given that it coincides with the end of the earnings season.
“This is probably just a round of profit-taking exacerbated by a lack of positive earnings news to counterbalance the negativity, and that the market still likely has a relatively high floor to how low it will fall,” he said.
Adams is advising his clients to stay cautious in the near-term, but not bearish.