During the 2016 campaign, the stock market was “with her” — when Hillary Clinton’s prospects improved, equities climbed. Summarizing the implications of the market’s behavior, one economist told Politico that a Trump victory would spur “major Brexit-style selling.”
Then the incompetent demagogue won. And investors remembered that what’s bad for the American republic is often quite good for their portfolios.
Specifically, Wall Street decided that Trump was all but certain to deliver a large tax cut to corporations — and business-friendly pushovers to America’s regulatory agencies — and that these two measures would (almost) certainly boost near-term profits (no matter how many Muslims the new president banned from the United States).
These convictions — combined with the already solid performance of the Obama economy — produced a sustained rally for equities.
But over the last three months, Wall Street has started to see through the fog of its tax cut–fueled euphoria, and glimpse the “chaos candidate” it once feared.
In February, Goldman Sachs made worried noises about Trump’s apparent lack of legislative chops. In March, the failure of Trump’s health-care bill affirmed such fears, causing a temporary dip in the market’s mood. Still, investors retained their (irrational) faith in the president’s capacity to deliver supply-side tax cuts. That faith, somehow, persisted through the president firing his FBI director — and then all but confessing that he’d done so out of a desire to obstruct justice.
But Tuesday’s events proved to be the sledgehammer that broke the bull’s back. As Bloomberg reports:
[T]he steady drumbeat of bad news may finally be taking its toll. On Wednesday, stocks tumbled, Treasuries soared and volatility came roaring back as a series of damaging revelations — from Trump’s disclosure of classified information to Russian officials to reports that he pressed FBI Director James Comey to drop a probe into former National Security Adviser Michael Flynn — prompted many on Wall Street to wonder whether the turbulence that has shattered the market’s calm might be the start of something bigger. It’s also left many to ask whether the market was blinded by its own optimism over Trump’s business-friendly agenda.
“Crazy times, huh?” said Matt Maley, an equity strategist at Miller Tabak & Co. “I’ve talked to a few personal friends and a few customers who I know are supportive of Trump that are saying, boy, this isn’t good.”
Behold, the wisdom of the markets.