Allies Turn Traitor to Stocks Cause as Trump, Fed Rekindle Doubt
(Bloomberg) -- Counting on your friends can be risky.
Or so it’s proving for equity investors, blindsided this week by two of their most steadfast allies. First it was the Federal Reserve, where incoming chairman Jerome Powell upped the temperature on inflation in remarks to Congress. Now it’s Donald Trump and his protectionist threats.
The treachery of allies is something new for investors made fat as years of central bank stimulus buoyed a decade-long rally that added $21 trillion to American equity prices. Not to mention those grown used to months of love from the president, particularly his $1.5 trillion tax overhaul.
“The stock market is figuring out what everybody has figured out about Donald Trump -- he has a mind of his own,” said Brian Frank, portfolio manager at Key Biscayne, Florida-based Frank Capital Partners LLC. “The stock market happened to like tax reform and infrastructure spending. But the stock market doesn’t like tariffs and I don’t think that’s going to change his mind.”
Aside from tweets about North Korea, bulls have embraced Trump’s initiatives -- from financial deregulation to tax cuts. The S&P 500 hit a record roughly once every four days in the 13 months through January. While pundits will forever debate whether Trump caused the spurt, it’s fair to say Wall Street is unaccustomed to him getting in its way.
That hasn’t been the case since Wednesday, as concern he is dragging the world into a showdown over trade extended a selloff. Trump’s decision to slap a 25 percent tariff on imported steel and 10 percent on aluminum sent markets from Tokyo to London into a tantrum, partly on concern Europe and Asia will retaliate. Stocks stabilized Friday as investors speculated any actual tariff might not be as severe as Trump’s rhetoric implied.
Part of it is the belligerence of the rhetoric, amplified in a series of Friday morning tweets. Part of it is also the fragility of equities, which suffered their first correction in two years last month as rising bond yields heightened anxiety about inflation.
“How many times has the president said or tweeted something that you thought would roil the markets, only to have investors not respond?” said Tony Dwyer, an equity strategist at Canaccord Genuity Inc. “Investors are responding now because we are on the other side of a ‘shock drop’ that was driven by historically optimistic sentiment and zero fear of the Fed.”
Speaking of the Fed, it was behind the S&P 500’s travails Tuesday and Wednesday, a 2.4 percent retreat that before last month would’ve qualified as the worst selloff in a year. Stocks slid as Powell, who has vowed continuity with predecessor Janet Yellen’s pace of interest-rate hikes, hinted the central bank may be faster on the draw than anticipated.
“Powell surprised people by being a bit more frank than folks expected,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors. “That doesn’t necessarily work as a Fed chair, especially when we’re latching onto every single word that the Fed officials say.”
The new chairman been at the helm for just a month, obviously too little time to say if the markets like him. What is clear is that a combination of rate angst and Trump’s saber rattling has erased half the S&P 500’s 7.7 percent rebound from a Feb. 8 low.
For the week, the S&P 500 ended down 2 percent, almost twice as much as any decline registered in 2017. The Dow Jones Industrial Average fell 3.1 percent, while the Nasdaq 100 index lost 1.22 percent. Small-caps lost 1 percent.
How justified is this week’s drop? Fundstrat’s Tom Lee says it’s an overreaction, a buying opportunity when other asset classes are sitting relatively still. That echoes Credit Suisse’s Jonathan Golub, who says a spike in volatility provides an “excellent” entry point unless the trade tariffs turn into a bigger problem.
Evercore ISI’s Rich Ross, a reliable bull during last month’s equity rout, is less certain about a quick rebound after the S&P 500 fell 2.7 percent, crossing both the 50- and 100-day moving averages in matter of days. The action of the past sessions and the absence of “identifiable” support does not inspire confidence, he wrote in a note.
Tariffs are “one of these parts of the Trump agenda that I think people have put to the back of their minds and said, look, he’s never really going to do it because it’s economically stupid,” said Michael Purves, Weeden & Co.’s chief global strategist. “But it looks like he’s going to do it. I think that there’s going to be a falling out of love -- the market and Trump may not stay in bed together the way they had done.”
©2018 Bloomberg L.P.