U.S. equities were battered in the worst selloff since September 2016 as a series of developments have roiled President Trump over the past week — all related to former FBI director James Comey, Russia and former national security advisor Michael Flynn.
All of this raises the specter of Congressional investigations, a possible appointment of a special prospector and even possible impeachment proceedings (the odds of which are rising in the betting markets, now around 25%).
For Wall Street, the concern is that the political blowback will threaten Trump’s pro-growth legislative agenda. Hopes for quick, bi-partisan action on things like tax cuts, infrastructure and healthcare reform are dimming fast. Legislation that was the basis of the massive post-election surge in risk assets in the first place.
In the end, the Dow Jones Industrial Average lost 1.8%, the S&P 500 gave back 1.8%, the Nasdaq Composite lost 2.6% and the Russell 2000 ended 2.8% lower. Treasury bonds surged, the dollar came under continued pressure, gold gained 1.8% on a safe haven bid, and crude oil gained 0.8%.
Breadth was heavily negative, at 3.9 decliners for every advancing issue on the NYSE. And volume was heavy, at 114% of the 30-day average.
Financial stocks led the way down as the odds of a Federal Reserve interest rate hike in June fell to 65% (from 88% one week ago) as long-term bond yields dropped. As a reminder, big bank stocks were among the leading stocks coming out of Election Day on hopes of higher net interest margins on “Trump-flation” — hope of higher inflation, higher interest rates and higher economic growth under the new president.
But that’s all coming undone now, bolstering the ProShares UltraShort Financials (ETF) (NYSEARCA:SKF) to a 4.3% gain for Edge subscribers. Edge Pro subscribers, for their part, are enjoying a 270% gain in their May $114 Walt Disney Co (NYSE:DIS) puts and initiated a position in the Bank of America Corp (NYSE:BAC) June $23 puts.
Yield-sensitive REITs and utilities led the way higher, with gains of 0.7% and 0.3%, respectively. Colgate-Palmolive Company (NYSE:CL) gained 5.7% after the NY Post reported its CEO told investors he is open to selling the company for a 40% premium to its last close. Target Corporation (NYSE:TGT) gained 1.4% in a rare bit of good news for the retail sector after reporting a big Q1 earnings beat on a smaller-than-expected same-store sales decline.
For the first time in months, Wall Street is under serious pressure. The Dow Jones has dropped below its 50-day moving average, the CBOE Volatility Index has surged above its 200-day moving average and safe haven assets like gold and Treasury bonds are well bid. Everywhere you look, serious technical damage has been done.
And this comes at a time when stocks, on a cyclically adjusted price-earnings ratio basis, had reached heights only exceeded going into the 1929 and 2000 bubble peaks; separated from falling earnings expectations; and had ignored a recent stalling in the “hard” economic data.
Breadth, as shown above, has broken down out of its post-December range. That suggests the selling pressure could intensify and wipe away much of the post-election hysterics.
For bank stocks in particular, brace for a reversal of most if not all of the gains of the past seven months — a drop of more than 10% from here.
Anthony Mirhaydari is founder of the Edge (ETFs) and Edge Pro (Options) investment advisory newsletters. A two-week and four-week free trial offer has been extended to Investorplace readers. Redeem by clicking the links above.