It seemed easier for investors when they could just focus on big ideas like health care and tax reform, and the benefits they would bring to the U.S. economy. Since the start of the year, Wall Street has been taking its cues from Washington, D.C., but the tempo of Washington has changed since the health care bill failed to gather enough support in the house of representatives a few weeks ago, and foreign policy has taken center stage.
Investors began the year with a bounce in their step, on hopes that President Donald Trump’s policies would provide the stimulus necessary for the U.S. economy to achieve escape velocity and break free of the low-growth mode it’s been in over the past nine years. However, this past week it felt more like investors were driving around on flat tires, as stock prices erratically bumped and swerved into the closing bell on Thursday.
Though the past week was the start of earnings season, with several companies exceeding expectations, investors finished the shortened trading week on Thursday the most pessimistic they have been all year. This could be seen in the price of the Standard & Poor’s 500’s one month volatility index on Thursday, reaching price levels that haven’t been seen since last November in the days leading up to the presidential election. It should be noted that high volatility readings can also be an indication that the stock market is close to a short-term bottom, when nervousness is the highest.
Some could argue that a lot has changed the past two weeks, as investors witnessed the president, still in his first 100 days, make retaliatory missile strikes in Syria while dining with the Chinese president, and leaving it up to military leadership to use the largest non-nuclear bomb in an aggressive air strike in Afghanistan. Still, some investors may be trying to wrap their head around the idea that although candidate Trump appeared to be soft on Russia and hard on China, in the last two weeks Trump appears to have become hard on Russia and soft on China.
Trump seems to be showing a level of flexibility that few anticipated, and investors will need to adjust to the new administration’s bold way of doing business.
Though the stock market slipped this past week, the bond market has shown strength with investors pushing high quality bonds prices higher (and interest rates lower). To the surprise of many, bond prices have been in an uptrend for over a month, and sending the message that there are no concerns of reflation at this time. Trump’s comments this past week that the U.S. dollar is getting too strong sent the dollar into a short decline. If Trump gets his wish of a weaker U.S. dollar, contrary to candidate Trump’s rhetoric, it would mean that interest rates would remain low as well.
Though it would be easy for any president to get distracted by all the issues going on overseas, to keep stock investors happy Trump needs to quickly put his economic agenda back on the table and in the public eye. This means continuing to find ways to compromise and move forward with health care reform. If the Trump administration can do that, then investors will likely step back into the market and provide support near the current price levels.