Trump Trade or Trump Tantrum? Today will tell

The Trump Trade could start looking more like a Trump Tantrum if his administration’s healthcare bill stalls in Congress, prompting worries on Wall Street about tax cuts and other measures aimed at promoting economic growth.

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Investors are dialling back hopes that US 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,” said the influential bond investor Jeffrey Gundlach, chief executive at DoubleLine Capital.

Wall Street rallied after the November presidential election, boosting sharemarkets around the world, 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. Priced for perfection

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 $US18.10 for every dollar in earnings expected on the S&P 500 over the next 12 months, near the most expensive US stocks have been in more than a decade.

“This is really about the fact that the market is pricing in too much certainty on a number of accounts,” said Julian Emanuel, executive director of US equity and derivatives strategy at UBS Securities. “Even if you got the positive vote, there’s still the residual knowledge that the agenda will be difficult to get through the Senate.”

While investors and strategists have said they do not see an immediate threat to the bull market, there is a risk of a 5 to 10 per cent drop – and corresponding falls in other markets. Only a bear market – defined as a 20 per cent 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 per cent is not unreasonable given how far we’ve come in such a short period of time.” ‘Symbolic significance’

Wall Street views the healthcare vote “as a test of Trump’s ability to unify the party,” said Brian Daingerfield, Macro Strategist at NatWest Markets. “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 – the big carrot for investors, which have been betting that increased government spending will boost profit growth.

“US 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.

Reuters