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Equities Politically Vulnerable

Posted by Joseph Trevisani on Apr 6, 2017 3:05:36 PM

In the five months after the November elections the Dow soared 18 percent on the promise of a Trump administration in Washington. But the risks of tying stock levels to political and central bank events rather than economics became apparent yesterday when a minor note in the Federal Reserve minutes and a comment from House speaker Paul Ryan gave equities their worst day in two weeks.

The Dow was close to its best level in two weeks just before the release of the minutes of the March FOMC meeting at 2:00 pm, trading at 20,850. Within an hour it had shed 40 points and within two 200 points were gone.  The top to bottom reversal of 233 points was the worst since February 2016. 

What caused such skittishness? Did the Fed governors voice concern for the actual strength of the economy? Were there many proponents of three and even four hikes this year? Did the members feel the bank is behind the inflation curve? No. The comment was one that various Fed presidents, including Chair Yellen had offered many times before. Equity levels are "quite high relative to standard valuation measures."

 Is the FOMC worried that equity prices are a product of the bank's monetary policy? It seems the markets certainly are. After all the Dow is within a few percentage points of its all-time high set on March 1st.  

Fourth quarter U.S. GDP  was 2.1 percent annualized and it is  tracking at 1.2 percent in the first three months of this year, according to the Atlanta Fed's GDPNow estimate. Together this is a dismal 1.65 percent, below even the 2.1 percent average of the past eight years, which has been the weakest recovery since the Second World War.

House Speaker Paul Ryan added to equity concerns when he said that tax reform could take longer than health-care and that the reason the Republicans in the House took up health care first was because they were closer to agreement with the Senate on that topic than they were on taxes.  

The Republican health-care bill collapsed last month on Republican dissension and attempts to revive the bill have been unsuccessful.  

What does that foretell for the rest of President Trump's pro-growth agenda? An agenda that is central to the equity market’s hope for a continued and strengthening recovery? 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters

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