D.C. drama rattles world markets.
Stocks take a dive on Wall Street after months of increases
Confidence in President Donald Trump’s agenda to stoke economic growth was questioned Wednesday, as stocks tumbled and the dollar weakened.
The sell-off was startling because it followed months of a steadily climbing, tranquil stock market, a rally that came to be known as the Trump bump. And domestic employment and corporate profits have been strong, usually a boon for stocks.
Yet investors, who have shrugged off previous turmoil in the Trump administration, were clearly rattled by the most recent episode.
Some on Wall Street speculated about whether the White House’s pro-business pledges to cut taxes, lighten regulation and increase infrastructure would be thwarted by the growing tumult in Washington.
Some bank analysts even discussed the probability of impeachment.
And at a gathering of big money managers in Las Vegas, Nev., the former chairman of the Federal Reserve, Ben Bernanke, said he was worried about the stability of Trump’s leadership.
“I think it’s a reasonable concern, obviously,” Bernanke said. He later added that after years of a strong economy, statistically speaking, it was time for a slowdown.
“Over the next four years,” he told an audience of hundreds of investors, “there is a pretty good chance we’ll have a downturn.”
The question is whether it began on Wednesday. The New York Times report Tuesday that Trump had asked James Comey, then the FBI director, to scuttle an investigation shook markets around the world.
Stocks ended lower in Asia and Europe on Wednesday. In trading in the United States, the benchmark Standard & Poor’s 500 index tumbled 1.8 percent, its sharpest decline since September.
Wall Street’s fear gauge, the volatility index known as the VIX, spiked 46 percent after a long streak at historically low levels. And the dollar weakened against other currencies, with the Bloomberg dollar index falling to its lowest level since the election.
One day in the markets does not make a pattern. Still, the reaction contrasted sharply with investors’ earlier complacency.
The surprising firing of Comey last week and even the news early this week that Trump had shared confidential intelligence details with Russian diplomats had little discernible effect on markets.
But the revelations on Tuesday that a memo written by Comey detailed a plea by Trump to shut down a federal investigation into his former national security adviser, Michael Flynn, over his ties to Russia, seemed to be more than investors could stomach.
“This piece of news, the market appears to be acting differently towards,” said Curtis Schenker, co-founder of Scoggin Capital Management. “For the first time, there is real concern that Trump has overstepped his boundaries, which may create some chaos in the market.”
The political risk has existed for months, with Trump’s provocative Twitter posts drawing scrutiny. Questions have been raised about links to Russia in his campaign team and administration, and, the White House has fumbled its legislative agenda.
Yet throughout the president’s first months in office, stock investors focused not on the questions and the missteps, but on the pro-business policies he had promised. These included health care changes that would save the government money, paving the way for lower taxes, and help private insurers.
One important pledge has been lighter regulation to help banks redeploy their capital and speed infrastructure projects. Perhaps the most anticipated change is a tax overhaul that would lower the corporate tax rate to 15 percent, helping big corporations and small businesses alike.
But with few policy victories in hand and the prospect of tax cuts seeming more distant, the reports on Trump’s plea to Comey stimulated a market backlash.
“Equities had been rallying for a long time, without much of a pause,” Stephen Jen, a Londonbased hedge fund manager, wrote by email Wednesday. “To the extent that the political noises in the U.S. further reduce the prospect of market-boosting measures such as tax cuts,” he added, “a correction in the risk assets,” in this case, stocks, “makes sense.”
Wednesday’s rout was so unexpected that, even with stock futures sagging early, few research notes analyzing the implications of the Comey news were written.
Analysts at Japan’s Nomura bank wrote that, while “impeachment still seems a distant prospect,” the “negative impacts that the latest developments have on Trump’s ability to pursue his policy agenda could be more important for markets.”
Still, not every investor was unnerved. With the U.S. job market robust, the prospect of improving growth and a season of healthy corporate earnings ending, the domestic economy is in good shape, some investors said.
That strong foundation cannot be undermined by possible presidential misconduct, they argued, no matter how serious.
In the absence of more negative economic factors a sustained sell-off in the markets was hard to envisage, Brad McMillan, chief investment officer of Commonwealth Financial Network, wrote in a note to clients. “We might see a bigger drawdown,” or dip in the markets, “but it is likely to be both limited and reasonably short-lived,” McMillan wrote. “There will be a time to worry, but right now, despite the very real issues being debated, we are still in a good place as investors.”