The President whose promises filled investors with hope is now giving them cause for doubt.
Fresh off the first major failure of Donald Trump's presidency, investors are reappraising whether the new administration can fulfill its pledges to cut taxes and improve infrastructure. That in turn is eroding the optimism that has propelled U.S. stock markets to new records since the election.
On Monday, the Dow Jones Industrial Average closed down 0.2 per cent, its eighth straight day of losses, while the S&P 500 edged lower by 0.1 per cent. Investors sought less-risky assets, such as U.S. Treasury bonds, sending their prices higher and yields lower. They also sold the U.S. dollar, which weakened against a basket of currencies.
On Friday, in the face of imminent defeat in a congressional vote, Mr. Trump and his allies abandoned a push to overhaul the U.S. health-care system. The legislation wasn't high on the wish list of investors, but it was viewed as a prelude to something that they consider extremely desirable: corporate tax reform.
Now any movement on tax reform, which promises to be another bruising political battle, will not begin until June. Before then, Republicans and Democrats will square off in what promises to be an acrimonious clash over the federal budget that could conceivably end in a government shutdown.
"A lot of stock prices are geared to an acceleration in economic growth and all kinds of legislative successes," said Margie Patel, a senior portfolio manager at Wells Fargo Asset Management, where she oversees $2-billion (U.S.). Instead, she predicted a period of "continued indigestion and disappointment" on both fronts.
Ms. Patel said that Mr. Trump's tax plan, if it passes, will not be completed until much later this year at the earliest, while its actual impact may not be felt until 2018. But she felt the health-care debacle had served a salutary purpose. "It's a good jolt of reality [for Mr. Trump] on how things get done on Capitol Hill," she said.
Some analysts say that markets have placed far too much confidence in Mr. Trump's ability to enact his agenda. "I've been saying that the Trump hype would morph into gripe," noted Sam Stovall, chief investment strategist at CFRA, an equity research firm in New York. As investors hoped for a laundry list of reforms, they lost sight of the difficulties of the legislative process and planned for "too perfect of an outcome," he said.
He added that if none of Mr. Trump's promises materialize, then stocks are "grossly overvalued." Mr. Stovall noted that at its most recent peak – on March 1 – the current bull market was the second-most expensive since the Second World War, as measured by price-to-earnings ratios on a trailing 12-month basis.
Mr. Trump has vowed to implement a major push to improve U.S. infrastructure but on Monday investors signalled their skepticism. A Bloomberg index of large industrial metal producers fell by as much as 3.9 per cent, the news service reported, as doubts about Mr. Trump's campaign pledge hit their shares.
After Friday's health-care setback, the major litmus test for Mr. Trump's economic agenda will be his promised overhaul of the tax code. His plan calls for slashing taxes on corporations and wealthy individuals and instituting a one-time tax break for companies to repatriate overseas earnings. To pay for such cuts, Mr. Trump is considering a "border adjustment" tax. Under such a measure, the goods that companies import would face a 20-per-cent tax while their revenues from exports would be exempt from taxes.
The defeat of the health-care proposal indicates "that complex and controversial tax reforms are likely to be difficult to pass," noted Alec Phillips, an economist for Goldman Sachs, in a note to clients. As a result, Republicans might scale back more ambitious proposals to reform the system – such as introducing the border adjustment tax – and instead pursue a simpler tax cut, he wrote.
David Rolley, co-head of fixed income at investment manager Loomis Sayles & Co. in Boston, said that he believes the likelihood of tax reform being passed is not higher than 50 per cent. "Do we panic if we don't get it? Don't be so quick," he said.
He noted that the Trump administration can loosen regulatory constraints on the financial and energy industries without needing to pass legislation, while global growth outside the United States is picking up. In that scenario, "What you have is okay earnings, with 2-per-cent-ish U.S. growth," he said. "That's not the end of the world."
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