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Why investors decided to start caring about politics again
By STAN CHOE, AP Business Writer
NEW YORK (AP) — Markets can’t ignore Washington politics any longer.
Last year, investors calmly brushed aside every surprise that came out of Capitol Hill or the White House. Whether it was President Donald Trump barring the arriv- al of travelers from certain countries, ring his FBI director or trying repeatedly to overhaul the health care industry, nothing seemed to knock markets o their steady, record-setting course that lasted through 2017.
Now, though, markets are moving sharply either in anticipation of policy changes or upon their announcement. Stocks recently have zoomed up and down on speculation about whether Trump’s decision to impose tari s on imported steel will lead to a global trade war. Late last year, Washington approved big tax cuts for businesses, and investors sent stocks surging.
e di erence is that Trump’s actions are now aiming at what the market cares most about: corporate pro ts.
“ e politics that matter for the market are the ones that impact the fundamen- tals,” said Stephen Auth, chief investment o cer of equities for Federated Investors. “Which politics have moved the market? e tax deal, and now the tari s. e other stu tends to be noise.”
It’s easy to see how the tax cuts will a ect corporate earnings: Lower tax bills will mean bigger pro ts, and investors hope the overhaul will encourage companies to spend more to expand their businesses, which would drive future growth. Analysts now expect S&P 500 earnings to grow 18 percent this year, up from a forecast of 12 percent a few months ago, according to FactSet.
A possible trade war could have just as strong an e ect for U.S. companies, but in the opposite direction. Big U.S. businesses have become reliant on overseas custom- ers, from Apple, which gets 63 percent of
its revenue from outside the United States, to Zoetis, an animal-health company that gets just over half from abroad.
If other countries retaliate against the U.S. tari s, escalating barriers to trade could hurt economies around the world through higher prices and slower growth.
Add in the high emotions Trump gen- erates, and big swings in the market can quickly result. e S&P 500 plunged 1.1 percent the day Trump rst mentioned the possibility of steel and aluminum tari s
to industry executives, only to recover and then plunge again in ensuing days as speculation swirled.
“Right now, half the country thinks that the president is a lunatic, and they have very little con dence in his rational ap- proach to issues, so they are worried about politics as an issue,” said Auth.
Auth believes thinks a global trade war is unlikely, although he won’t rule it out. So he viewed the market’s recent drop as an opportunity to buy at lower prices at a time when the economy is continuing to grow and corporate pro ts keep piling higher.
It may take a while to see if the worries
about a global trade war were prescient, as other countries mull their options. Trump has already exempted Canada and Mexico from the tari s and said he will be “very exible.”
If the fears stay in the foreground, they will likely be a dominant force for the market. If the trade-war talk dies down, though, the Federal Reserve and the threat of higher interest rates will likely return to the top of the list of investors’ concerns.
Fear of a more aggressive Fed rst jolted markets from their pleasant ride at the start of February, when worries about higher in ation pushed investors to ratchet up their expectations for Fed rate increases this year. at fear has abated somewhat with recent government reports showing only modest growth in wages and con- sumer prices, signals that in ation remains under control for now.
“It’s really a horse race between the President and the Fed in terms of what’s important and when,” said Brian Jacobsen, senior investment strategist at Wells Fargo Asset Management.
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