It was one of Donald Trump’s most prominent pre-election pledges, so when the much-vaunted repeal of Obamacare failed to secure the support it needed in Congress, Wall Street signalled its disapproval via a massive share dump, bringing the stock market’s seemingly unstoppable rise to a screeching halt.
If the stellar performance of the S&P over the past few months demonstrated a level of confidence in the ability of the new president to deliver on his promises, this abrupt volte-face is a reflection of a more sombre mood. Tumbling US shares prefaced similar dips in Tokyo, Frankfurt, Paris and London as global markets wobbled over the prospect of the Trump administration’s ability to deliver on a raft of growth-boosting measures.
Markets responding to uncertainty
Share prices have climbed steadily since last November’s election on the back of optimistic growth forecasts that rely on the ability of the new president to press ahead with a package of tax cuts, leveraging his Republican majority in Congress to deliver a powerful fiscal stimulus to a nation that’s still struggling to nudge its growth rate upwards.
And yet, with the repeal bill falling at the first hurdle, causing Trump to suffer what many will regard as a humiliating defeat at the hands of his own party, it looks likely that there’ll be many more delays before subsequent reforms are tabled.
Reflation on the back burner
Markets were further undermined as news of an increase in US oil stocks sparked a drop in the cost of crude – already under pressure over rumours of the imminent collapse of an Opec-brokered deal to curb production. Brent crude was trading at less than $50 a barrel - down more than 10% since the beginning of the month.
Which means that the twin pillars of anticipated reflation – Trump’s fiscal boost coupled with a spike in oil prices – have hit the rocks in the last few weeks, causing widespread concern about the prospects for renewed growth. And, while it’s unlikely that Wall Street will see all its recent gains decimated, we can expect to see more volatility in the coming months.
A change in tactics
The recent buoyancy in the markets is a direct result of the expectation of stronger growth – ignoring the possibly negative consequences of Trump’s strategy, including higher inflation and an overvalued dollar. The correction we’ve witnessed reflects a dip in confidence and an acknowledgement that not only may it be some months before Trump’s tax cuts and infrastructure spending get the green light but that the president’s plans may well have to be significantly pruned.
If – as the Congressional Budget Office has said – savings from Obamacare’s cheaper replacement actually aren’t as significant as first thought, money to fund the fiscal boost would have to be found elsewhere. And, if stronger growth leads to a renewed demand for labour which, in turn, fuels wage inflation, the Federal Reserve might well accelerate the pace of interest rate increases – a strategy that could well result in a stronger dollar and less competitive exports.
Wait and see
The Dow Jones Industrial Average passed the 21,000 mark this month following a sustained rise that couldn’t be expected to continue indefinitely. With a second Fed rate rise in the bag, and more to come, there was bound to be a dampening down of market activity. As the dust settles, it remains to be seen whether Trump’s policies – rather than his pledges – will meet market expectations in the long-term.