The streak is over. For the first time in 109 sessions — going all the way back to October — large-cap stocks suffered a loss of more than 1%. All at once, the overconfident and overextended bulls were suddenly reminded that, yes, stock prices can actually fall. And they can fall hard, with Tuesday’s losses wiping out a month of gains.
The catalyst was growing apprehension about legislative gridlock in Washington, as hopes dim for President Trump’s healthcare reform efforts ahead of a House of Representatives vote on Thursday. With conservative members of the House lukewarm in their support, and democrats frigid, this is seen as jeopardizing any push on tax reform and infrastructure spending this year — things that investors had aggressively priced into equities since Election Day.
In the end, the Dow Jones Industrial Average lost 1.1%, the S&P 500 gave back 1.2%, the Nasdaq Composite dropped 1.8% and the Russell 2000 ended the day 2.7% lower.
Treasury bonds were stronger, the dollar was weaker, gold finished up 1% and oil lost 1.8%, adding to Monday’s 1.2% slide. That boosted the ProShares UltraShort Crude Oil (NYSEARCA:SCO) recommended to Edge subscribers by 3.1%, bringing its total gain since the beginning of February to 24%.
Defensive utility stocks bucked the trend to rise 1.4% on safe haven bids and the lift from strength in T-bonds. Bank stocks — which led the way higher out of the election and outperformed the overall stock market by more than 10% — led the way down with a loss of 3.9%, pulling the broader financial sector down 2.9%. Materials were the next on the loser list, a causality of “reflation trade” reversals, down 1.7%.
Pan American Silver Corp. (USA) (NASDAQ:PAAS) climbed 4.4% on an upgrade from analysts at RBC Capital on positive expectations related to two new mine projects coming online. Deutsche Bank AG (USA) (NYSE:DB) rose 4.1% — impressive in light of the mess in financials today — thanks to the closure of a criminal inquiry by the U.S. Justice Department into currency-trading activities without action. And Chipotle Mexican Grill, Inc. (NYSE:CMG), still recovering from food safety concerns, rose 2.8% after M Science reportedly issued comments that March comp-store sales have accelerated.
On the downside, bebe stores, inc. (NASDAQ:BEBE) collapsed 45% on reports the company will close its physical stores and attempt a turnaround as an online brand. This provides yet another indication that something is wrong with the American consumer amid weak overall retail sales, troubles at retailers like Target Corporation (NYSE:TGT), and ongoing pressure on retail real estate.
Bank of America Merrill Lynch turn the entire consumer discretionary sector to market weight on Monday, citing the negative impact of rising wages on profit margins and noting the group is the most negatively correlated to inflation, which is now rising. Credit Suisse also downgraded the group, citing overly optimistic valuations.
That sound you hear? Air rushing out of the post-election sentiment bubble that was all based on valuation expansion on hopes of lower corporate taxes, a repatriation holiday to bring back foreign cash holdings and the promise of stimulus spending on infrastructure and military hardware.
The facts on the ground are much different. Whole economy measures of corporate profits have stalled. With “hard” data points like retail sales soft, the Atlanta Fed’s GDPNow estimate of Q1 growth is a pitiful 0.9%. And the Federal Reserve is aggressively hiking interest rates.
And corporate earnings haven’t gone anywhere over the past three years, as shown above.
Adding to the pressure is concern that Trump could pivot to broader tax reform, which is likely to include a border adjustment tax to help pay for personal income tax cuts. That’s more bad news for retailers, who are likely to suffer profit margin contraction as a result.
And the drop in crude oil also undermines the post-election reflation theme as OPEC further loses control of the market as U.S. shale producers ramp up activity following last November’s supply freeze agreement by the oil sheiks.
With sentiment and investor positioning off-the-charts extreme, the downtrend likely has a ways to run.
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.