How long can Wall St. ignore Washington’s woes?
The rising political turmoil is beginning to wear on stock market.
A CEO mutiny against President Trump. An escalating nuclear threat involving North Korea. Uncertainty about the future of healthcare reform. The departure of top Trump strategist Steve Bannon.
So far the mounting turmoil has not rattled Wall Street to a significant degree, with the stock market still hovering near record highs.
There’s an old saying that stocks often “climb a wall of worry,” and this summer it seemed investors stopped worrying much at all about the political noise emanating from Washington.
“We’ve gone a very long time without so much as a modest correction” in stock prices, said Ryan Detrick, senior market strategist at investment firm LPL Financial. Although stock indexes certainly have headed south on particular days, a correction usually is defined as a decline of at least 10% in a stock, bond, commodity or index.
The market’s ascendant attitude might be changing because U.S. political unrest has become so incessant of late, some analysts said.
“The exacerbation of the polarization in Washington is beginning to wear on the markets and we’re seeing some [broad-based] selling,” said A.C. Moore, chief investment strategist at Dunvegan Associates Inc., a financial consulting firm in Santa Barbara.
Various technical indicators are flashing that “people want to de-risk their portfolios because they are concerned about leadership in Washington,” Moore said.
Some cracks showed Thursday, exacerbated by terrorist attacks in Spain, when the Dow Jones industrial average fell 274 points, or 1.2%, its worst one-day point loss in three months. The drop also ended a 63day streak of sessions without moves of 1% or more in either direction.
The decline came after several chief executives resigned from Trump’s business advisory councils in protest of his response to a deadly white-supremacist rally in Charlottesville, Va., and the panels were disbanded.
On Friday, stock indexes fell again but began to rally after the White House announced that controversial Trump advisor Bannon had left his job. Then, near the end of the trading day, stocks were pulled lower by bad financial news from sporting goods retailers.
Wall Street also is uncertain whether healthcare reform will occur, and whether the Trump administration can achieve its plan to cut corporate and personal income taxes and bolster the nation’s infrastructure.
“The market hasn’t officially priced in benefits from policy changes on tax reform, infrastructure spending, repatriation and de-
Despite the bullish earnings and economic trends, some analysts said they would not be surprised if the market retreated amid the growing political divide in Washington.
regulation, but hope for these changes seems to provide some support to the market,” Lindsey Bell, investment strategist at CFRA Research, said in a note to clients.
Stocks have shown a notable resiliency for several other reasons: Corporate earnings continue to rise, U.S. interest rates and inflation remain low and there’s economic growth nearly worldwide. Key indexes of most major foreign stock markets also are positive for the year.
The Conference Board said last week that its leading economic index — a broadly based measure that can signal upcoming U.S. economic trends — rose 0.3% in July after a 0.6% gain in June.
The gains are “suggesting the U.S. economy may experience further improvements in economic activity in the second half of the year,” Ataman Ozyildirim, the board’s director of business cycles and growth research, said in a statement.
It’s for those bullish reasons and others that “the market is completely divorced from whatever is going on” in Washington and elsewhere, CNBC analyst Jim Cramer said last week.
The Dow Jones industrials ended the week at 21,674.51, not far below the record high 22,118.42 set Aug. 7.
The benchmark Standard & Poor’s 500 index finished at 2,425.55; it also set a record Aug. 7, of 2,480.91. And the tech-laden Nasdaq composite index closed Friday at 6,216.53. Its high of 6,422.75 was set July 26.
Corporate profits are the main engine driving stock prices higher, as is typically the case over the long haul, and earnings have continued to climb.
The average earnings of the S&P 500 companies rose 11% in the second quarter compared with a year earlier, the second consecutive quarter of double-digit growth, Detrick said. It was the first time quarterly S&P 500 earnings posted back-toback double-digit gains since 2011, he said.
Those higher profits have helped justify the higher prices paid for stocks this year.
The price-to-earnings ratio of the S&P 500’s stocks currently is 20.96 for the trailing 12 months, according to research firm Birinyi Associates. That’s well above the historical average of 15.5 but little changed from the index’s 21.7 P/E ratio in February.
In other words, the sizable advance in stock prices this year has not outpaced the rise in earnings, preventing stocks from becoming “too rich” and ripe to sell — at least on the basis of corporate profits — in the minds of many investors.
And all major U.S. indexes still have solid gains this year: The Dow is up 9.7%, the S&P 500 has gained 8.3% and the Nasdaq composite is up 15.5%.
Yet, despite the bullish earnings and economic trends, some analysts said they would not be surprised if the market retreated amid the growing political divide in Washington. If nothing else, the tension would provide a rationale to take profits after the market’s solid advance, they said.
“Could some of this drama create a normal correction? We wouldn’t be shocked at all if that was the case,” Detrick said.