April 5, 2017

Trump Bump Concerns

After the ACA failed to be repealed, Trump shifted focus to the budget, which is set to hit its ceiling by the end of the month. It is already on life support and would face a government shutdown. Does the market care? We saw only a modest move lower after the ACA repeal failed, but only in that it was part of the budget savings. As anticipated, the focus has shifted to earnings, which are expected to rise over 7% year-over-year, so a decent quarter. That is what has provided resilience here.

On a broader view, today's ADP report gave the Dow a near-200 point rally to start the day. Those gains evaporated on two comments. One, Paul Ryan said tax reform may take a while, in that the House expected to take the lead, but the Trump Administration also put forth a plan, which the House must take into consideration. The Senate says its working on its own plan. As we saw in the ACA fight, there are going to be very diverse requests from the Republican camp. There are no easy answers for even one side. Like a teeter-totter, the "Freedom Caucus" wants massive cuts and far fewer government programs. The more moderate Republicans, known as the Tuesday group, have states that rely on many of these services, and would be one-time members if they vote for such a harsh program.

The other news was that the minutes from the last Federal Reserve meeting were released. The Fed is looking to unwind its $4.5 trillion balance sheet by selling some of the mortgage backed securities and Treasury bonds. 10-year bond yields briefly rose, but combined with a delay in tax cuts and budget problems, the Fed removing liquidity was suddenly a recipe for slower economic growth. Yields plummeted, Financial stocks fell as the yield curve flattened more, oil inventories and potential slower growth unwound early gains in energy stocks, and the broader market followed.

Technically, this was a "reversal day" to the downside. That has negative implications for the market going forward, especially if the NASDAQ, representing the very strong Technology sector, can't recover. The NASDAQ had made a new all-time record intra-day high before falling to the low of the day to close down 0.58%. Keep an eye on Financials and Technology, as they are the market leaders and would be necessary sectors to support the market after Wednesday's breakdown.

The Fed comments don't usually have staying power. Follow what they do, not necessarily what they say. Rate increases were in the offing. Selling holdings would be better activated when inflation starts to show. This was a discussion in the meeting, not a set schedule of action. Therefore, look for the selling to calm down as we dip into support levels here. With earnings a week away, we expect there to be some support coming into play.

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