Trump Trade which was a hallmark of the bullish sentiment that drove markets since November 2016 is beginning to lose some of its luster, and investors are adopting a risk off approach to equities. Multiple defeats for the Trump White House have turned the proverbial tide against equities markets and we have witnessed several consecutive days of sharp losses on Wall Street. The Dow Jones Industrial Average has a 1 year return of 20.94%, but a year to date return of just 4.56%.
Wall Street Remains Bullish but Mildly So
Shifting our attention to the NASDAQ, similar trends are evident, with a 1 year return of 29.40% and a year to date return of 12.48%. The S&P 500 index follows in the same fashion with a 1 year return of 17.99%, and a year to date return of just 5.67%. Some of the worst performing stocks on the Dow Jones include the financials such as Visa, and JPMorgan Chase and Company. Bank of America has also generated poor returns over the course of the past 5 days. Its weekly performance is down 6.54% (May 18, 2017), while its monthly performance remains subdued at just 0.62%.
The nearly 6% decline in the price of Bank of America stock is troubling on many fronts. Recall that bank stocks were driving markets on the back of calls for deregulation on Wall Street, interest rate hikes from the Fed, and massive infrastructure spending through fiscal policy. So far, the performance of Wall Street has not filtered down to Main Street. But rising interest rates are indeed a source of concern to everyday households in the US. The last thing that anyone wants is an impending debt trap , what with interest rates rising and people turning to save-haven assets such as gold and treasuries. If markets reverse, there is no telling what level of damage could be done to retirement portfolios.
Political Quagmire Threatens to Upend Equities Markets
It is clear that the swamp that President Trump has been seeking to drain is bogging him down. The president’s unconventional approach to Washington politics has him at sixes and sevens with Republicans and Democrats alike. Many GOP House and Senate members are now calling for investigations into claims of taped recordings between ousted FBI director Comey and President Trump. The widely-reported memo that claims to suggest Trump was pushing Comey to drop the investigation into General Flynn is a source of concern to everyone. Markets have reacted to this volatility in a big way. Bank stocks, once assured of a robust economic climate are now a little uncertain. The whisperings of impeachment are being bandied about by Democratic lawmakers, and equities are having none of it.
What are the Odds of An Additional Fed Rate Hike in Coming Months?
According to the CME Group FedWatch tool, the probability of a rate hike on June 14, 2017 is now down to 73.8%. A week ago, on May 11, 2017, the likelihood of a rate hike was 83.1%. As the Fed FOMC members move away from a rate hike, bank stocks tend to retreat. We have seen sentiment to this effect with major banking corporations like Wells Fargo & Company, Citibank, Bank of America and JPMorgan Chase and Company. The 5-day change for Wells Fargo & Company is – 2.53%, the 5-day change for Citigroup Inc. is -1.02%, and the 5-day change for JPMorgan Chase & Company is -3.67%. These are not coincidences – they are directly attributed to the decreasing probability of a rate hike in June, and the volatility that has hit financial markets as a result of brewing White House scandals.
The US economy managed to add 211,000 jobs in April 2017 – a glowing testament to a fundamentally sound economy. Additionally, the unemployment rate dropped to 4.4%, from a March figure of 4.5%. These economic data releases helped to drive up the value of the USD, which is reflected by the performance of the US dollar index. The US dollar index is now at 97.85, for a 5-day performance of -1.81%. All of these economic data releases are bearish, and they will continue to remain that way until clarity is injected into the markets. The year to date performance of the US dollar index (a broad measure tracking the dollar against 6 other currencies) is -4.43%. Viewed in perspective, there is indeed cause for concern and many are wondering whether the lengthy equities bull market is about to come to a grinding halt