Forget the fact that US Jobless claims came in at a 28 1/2-year low or that Walmart (WMT) beat Street estimates and its digital sales jumped 63%—all eyes are and will be on Washington. Wednesday was the market’s worst day of 2017—one in which the Dow (^DJI) lost -372.82 points (down -1.78%), the Nasdaq (^IXIC) lost -158.63 points (to finish the day down -2.5%), and the S&P 500 (^GSPC) lost 1.82% (down -43.63).
Unfortunately, all the good news since the election that brought the market up over 2000 points and to new highs almost every week, has been sadly sidelined for the time being. Although the fundamentals still remain strong, the driving force behind the Trump rally was the hope and anticipation of tax cuts, health care reform, and rolling back regulations—regulations that have been breaking the backs of small businesses. That’s why we saw the S&P 600 small cap index (^SP600) fall -2.6%. The index is now off -5% from its high of 866.80.
The VIX fear index (^VIX), which had been trading in single digits, ran to a three-week high of 14.59. Yesterday’s spike of 21% made it the most volatile day in the past decade with the VIX. Bonds and gold, which usually do well in times of negative turmoil in equities, didn’t disappoint. The yield on the benchmark 10-year fell -11.4 basis points to 2.247%—the largest one-day yield decline since June 2016. Bond prices move inversely to yields.
The Federal Reserve meets in less than a month. It was anticipated that it would raise rates by 25 basis points (0.25%). If things settle down and this is the worst move in the markets, I give it a 70% chance that we will get that hike.
Can the Trump train be put back on the tracks and move forward? Yes, by all means! The fundamentals are there: A great earnings season coming to a close, along with a strong jobs market and growing wages for the American public. However, if this in-fighting in Washington persists, expect to see a market that will continue to be very volatile with no real growth.