After a strong start to the year, the U.S. stock market posted its biggest weekly decline in months, as investors embraced the failure of the Republican Party’s health care bill. Since the election, all three of the major U.S. indexes have set record all-time highs, on the hopes that President Donald Trump will stimulate the economy through job creation and tax reforms. However, the sharp selloff in the markets, following the bill’s defeat, suggests investors are worried that a delayed replacement of former President Barack Obama’s Affordable Care Act, more commonly known as “Obamacare,” could signal further setbacks for Trump’s other pro-business policies.
Without the support of the entire Republican Party, Trump’s replacement proposal, the American Health Care Act, seemed doomed to many from the start. Trump, who has been criticized for his inability to unite the GOP since taking office, struggled to rally support from his fellow party members in this first major legislative test. The combination of millions of people losing both their insurance and the possibility of the government increasing spending through tax credits made the replacement bill a hard sell to many Republicans.
While some analysts see the failure of the health care bill as a harbinger for Trump’s future reforms, others describe the loss as a victory, saying that it will speed up the process for the administration’s more popular growth initiatives. Jim Cramer, host of the CNBC show, “Mad Money,” encouraged his viewers to take advantage of the bear markets and invest in sectors such as industrials and financials, which would otherwise benefit from lighter regulation and lower taxes.
“I think the swift failure of the health care plan allows Trump to go back to his economic agenda—the things Wall Street really wants—and while he can be his own worst enemy for certain, it’s a heck of a lot easier to cut taxes than it is to cut health care,” said Cramer.
The Dow Jones Industrial Average posted its eighth consecutive down day on March 27, its longest losing streak in over five years. The Dow fell a total of 1.9 percent during the stretch before bouncing back 0.73 percent on Tuesday. Financial stocks, which contributed to most of the losses, also contributed to most of the gains amid strong consumer confidence data.
The demise of the health care bill was a reality check for investors, who reaped big gains from the post-election rally. The string of negative trading sessions in the markets gave investors time to reevaluate their positions and also allowed markets to cool off. Optimism over Trump’s economic agenda in the past few months lifted stocks to record highs, causing some to be overpriced based on their current valuations. According to a recent survey by Bank of America Merrill Lynch, 34 percent of fund managers who were polled said that the current stock prices are overvalued. In addition, the same report states that investors are holding 4.8 percent of their portfolios in cash, which can be utilized in down markets.
Instead of further propping up share prices, some investors want to see rebalancing in the markets. An article in “The Wall Street Journal” states, “on average, market corrections occur each year.” While investors typically want to see markets rising, they also believe that “long periods without corrections can lead to unruly trading and end in larger, more disruptive declines.”
According to FactSet, a multinational financial data and software company, the Standard & Poor’s 500 has recently traded at its highest price-to-earnings ratio since 2004. In a message to his clients, CFRA chief strategist Sam Stovall said, “Since prices lead fundamentals, the fundamentals better start picking up the pace in order to justify such extended valuations.”
The dollar also plunged to its lowest level in over four months. The U.S. currency gained ground earlier this year when the Trump administration promised to push through tax reforms and infrastructure spending. The Wall Street Journal Dollar Index, which measures the value of the dollar against 16 other major world currencies, was recently down 0.4 percent at 89.66 after the disappointing series of events over the GOP’s failure.
The collapse of the health care plan will also impact the Trump administration’s promised tax reform. If successful, the AHCA would have covered some of the deficit that would have been created under the proposed tax plan. The corporate tax cuts, set to reduce rates from 35 percent to 20 percent, would provide companies an earnings boost and more capital to spend and invest. If the GOP cannot find a way to pay for the tax cuts, then the tax reform bill could face the same ultimatum as the health care plan.
After seeing the bill fall apart, Trump has announced that he will seek support from both major parties for the deal on health care.
“We are going to be doing a great job. Hopefully it will start being bipartisan because everybody really wants the same thing,” said Trump in a meeting with Senate members at the White House on Tuesday, March 28. “We want greatness for this country that we love. I think we are going to have some very good relationships.”