February 5, 2018 / 10:33 PM / 4 months ago

Breakingviews - U.S. stock plunge is a welcome reality check

By Tom Buerkle

A television screen shows the days losses on the floor of the New York Stock Exchange in New York, U.S., February 5, 2018. REUTERS/Brendan McDermid

NEW YORK (Reuters Breakingviews) - President Donald Trump may regret attaching himself so closely to the stock market. U.S. indexes fell over 4 percent on Monday and share-price volatility at one point surged to a seven-year high. A breather – at a minimum – was overdue after a record run.

Trump’s surprise election 15 months ago and hopes of tax cuts and deregulation have fueled a rally unprecedented in its steady duration. As of Feb. 2, the S&P 500 Index had gone more than 400 days without so much as a 5 percent downturn, according to Bank of America Merrill Lynch.

Monday’s decline ended that streak, leaving the index around 8 percent below its record close on Jan. 26 and in the red for the year to date. The drop in the Dow Jones Industrial Average, which has outperformed the S&P 500 of late, was even more dramatic. The decline may shock investors who poured $16.2 billion into U.S. equity mutual funds in the week ended Jan. 31, according to Thomson Reuters Lipper.

The selloff comes in spite of corporate America’s robust health. Just over half of S&P 500 companies have reported results for the fourth quarter of 2017. More than three-quarters of them have exceeded earnings expectations while 80 percent have topped sales estimates, according to Thomson Reuters I/B/E/S. The tax cuts that Trump signed into law in December promise to give a fresh impetus to earnings and, perhaps, to economic growth.

One risk is the stimulus proves too much of a good thing. U.S. Treasury-bond yields have been edging up since December, increasing corporate borrowing costs and making stocks relatively less attractive for investors to hold. News that average wages rose 2.9 percent in January from a year earlier accelerated the trend. Some market participants fear the Federal Reserve might quicken the pace of interest-rate increases to keep a lid on inflation. That’s in addition to the pressures of a widening federal deficit, expected to rise to nearly $1 trillion in 2019.

Global growth is gaining steam, and still-generous central banks outside the United States are slowly following the Fed toward less helpful policy. Companies remain very profitable, yet America’s economic fundamentals are shifting, and not necessarily in a positive direction for stock investors looking ahead. They can thank themselves for the wake-up call.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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