There are 2 powerful forces competing for supremacy in the stock market

pulse

May 17, 2017 6:25 PM

Wednesday's market sell-off raised questions about whether Wall Street has given up on Trump's agenda.

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US stocks on Wednesday had their most acute sell-off since President Donald Trump took office.

At issue were compounding reports that shifted lawmakers' focus away from Trump's economic agenda. The New York Times reported on Tuesday that Trump asked James Comey

For a quiet market that had largely ignored political risk, Wednesday's sell-off raised questions about whether Wall Street has given up on Trump's agenda to cut taxes and ease regulations.

Buying on weakness

The same dynamic was in play when China unexpectedly devalued its currency in August 2015. After the S&P 500 underwent an 11% correction, traders bought the dip and restored the benchmark to its pre-sell-off levels within about two months.

That perhaps reflects the fact that economics has historically mattered more to markets than politics, and the economy does not appear to be teetering on the brink of recession.

Still, investors are markedly less hedged than they were in those two situations, as indicated by the VIX's near-record low level heading into Wednesday. That could make the market more susceptible to a downward shock or, worse yet, leave it less able to recover as quickly.

The endgame for the Trump White House — and importantly, the reforms Wall Street is anticipating — is still uncertain. "Impeachment still seems a distant prospect, meaning negative market effects are likely to be more limited over the medium term," Kevin Gaynor, the head of international research at Nomura, said in a note on Wednesday.

While views on impeachment are likely tainted by one's own political views, Gaynor says the chances that two-thirds of a Republican Senate removes its own president is low. That supports dip buyers, who stay focused on renewed earnings growth and the strength of the economy.

But the so-called Trump trades like financial stocks — some of which were in place before the election — could be due for a quicker unwind.

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