A poster child for the so-called Trump trade is suffering a catastrophic 25% drop on Wednesday, and that should serve as a major warning to investors.
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One plunging stock shows exactly what's at risk with the Trump trade (X)
US Steel's huge share decline is a warning sign for any investor who's bought stocks based on expected policies from President Donald Trump.
Traders signal offers in the Standard & Poor's 500 stock index options pit at the Chicago Board Options Exchange (CBOE) on August 24, 2015 in Chicago, Illinois.
US Steel enjoyed a postelection stock-price surge, which reached 69% at its peak. As the nation's second-biggest steel producer, the company was a way for investors looking to capitalize on President Donald Trump's pledge to spend $1 trillion on infrastructure and his push to get people to "buy American."
But a company can trade on expectations only for so long. Eventually, optimism has to be backed up with results.
So when US Steel posted a per-share loss on Tuesday night that was more than double what analysts forecast, reality set in. Almost $1.5 billion of lost market cap later, US Steel is a cautionary tale for investors across all industries that are willing to overlook fundamentals in the hopes that government measures will boost their bottom lines at some point in the future.
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With reports suggesting the White House plans to move infrastructure spending to 2018 at the earliest, the company's three remaining earnings reports this year are looking awfully ominous.
That US Steel's share price comeuppance was so swift should come as little surprise, given the apparent lack of worry and hedging activity in the US stock market. As of Tuesday's close, the CBOE S&P 500 Volatility Index — commonly known as the "fear gauge" — sat 1.5 points from a record low and 43% below the bull-market average.
Creeping realization
Investors in US Steel had begun souring on the postelection trade, with the stock falling 25% over about eight weeks after reaching a more than two-and-a-half-year peak in February. It was part of a marketwide unwinding that saw investors frustrated with Trump's lack of progress on the policy front.
And it's not as if investors aren't worried about the Trump trade getting overextended. A record number of institutional investors think US stocks are the most expensive in the world, according to Bank of America Merrill Lynch's latest Global Fund Manager Survey.
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But it's not just US Steel and other industrials that have rallied hard in the wake of Trump's election. The other areas of the market on notice now include highly taxed companies, which would be helped by a big cut if it made its way through Congress, and financial firms that could benefit from looser regulations proposed by Trump.
While they won't all whiff the way US Steel just did, all of them have been pumped up by the Trump trade.
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