MARKET SNAPSHOT: Stock Market Faces Crucial Test As Trump Suffers Setback
26 March 2017 - 9:13PM
Dow Jones News
By Sue Chang, MarketWatch
Bank of America: This is a 'where's the beef?' moment for Trump
trade
The stock market will face its moment of truth next week as
euphoria over President Donald Trump's lofty agenda to "make
America great again" collides with the realities of U.S.
politics.
Trump suffered a major blow on Friday when House Republicans
withdrew
(http://www.marketwatch.com/story/health-bill-pulled-as-republicans-lack-votes-2017-03-24)
the American Health Care Act after they failed to secure enough
votes to pass the bill.
The withdrawal is a setback to the president who had promised to
repeal and the replace the existing Affordable Care Act with a
superior plan and casts doubt on how quickly his administration
will be able to deliver on other key pledges such as tax
reforms.
"Failure may not result in a real tantrum but confidence in the
Trump agenda will be weakened by the loss, no matter who he blames
it on," said Kevin Giddis, head of fixed income capital markets at
Raymond James.
Giddis expects volatility to rise in the coming days given that
"so much of the happiness in the equity market was based on a
number of initiatives becoming new laws."
The CBOE Volatility Index spiked 15%
(http://www.marketwatch.com/story/stock-markets-old-friend-volatility-threatening-to-make-a-glorious-return-2017-03-24)
this week to 12.96, its biggest one-week jump this year.
The difficulty over the health-care bill is likely to serve as a
wake-up call for investors who had bid up stocks in anticipation of
more business-friendly and pro-growth policies from Trump.
"Up to now, the market rally has been based on the expectation
that Trump and the Republicans would enact meaningful change," Brad
McMillan, chief investment officer for Commonwealth Financial
Network, said in a note. "Hope has been the dominant emotion since
the election, and all of the political noise has been viewed in
that context."
That hope may soon evaporate after investors on Friday got a
glimpse of things to come.
The fact that the health-care bill floundered does not bode well
for the Republicans' ability to work together and may lead to
delays in tax cuts and fiscal stimulus, according to Andrew Hunter,
U.S. economist at Capital Economics.
Still, the political drama is not expected to be a death knell
for the market's upside momentum.
"There will likely be some weakness but it is doubtful that it
would carry far before stocks begin to rally again," said Bruce
Bittles, chief investment strategist at Robert W. Baird & Co.
"There has been a rapid deterioration in stock-market sentiment the
past few weeks. This suggests that cash is accumulating on the
sidelines and that some of the potential negative news is already
built into current prices."
The S&P 500's relative strength index, a momentum indicator,
recently rose above 80 for the first time in 20 years, according to
strategists at Morgan Stanley. Although this suggests elevated
near-term risks, it also indicates a bullish trend in the long term
and the large-cap index has typically risen sharply in the
following 12 months.
Michael Hartnett, chief investment strategist at Bank of America
Merrill Lynch, predicted a temporary dip in the S&P 500 but
believes the correction should not be feared.
"A stock market sell-off can be a good catalyst to bring
ultimate passage of legislation," he wrote in a report. "In our
view, the Trump trade was always going to meet a 'where's the
beef?' moment....This is it."
The S&P 500 fell 1.98 points, or 0.1%, to close at 2,343.98
shedding 1.4% for the week, its biggest drop since November. The
Dow Jones Industrial Average slid 59.86 points, or 0.3%, to
20,596.72 for a weekly decline of 1.5%, its worst showing since
September.
(END) Dow Jones Newswires
March 26, 2017 15:58 ET (19:58 GMT)
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