On March 21, benchmark US equity indexes fell over one percent for the first time in more than 100 trading sessions. Although the magnitude of pullback wasn’t large enough to send off an alarm, and there was no notable follow-through selling afterwards, it still marked a clear departure from the uptrend and market strength that had prevailed for months.
Given this, it’s perhaps time to ask if the Trump rally will continue to hold.
While the S&P 500 shed 1.24 percent that day, small cap index Russell 2000, typically more volatile, lost 2.74 percent. If the broad market is reversing the bull trend, Russell 2000 would be a good leading indicator as investors are likely to cut back their exposure to riskier assets first if they feel increasingly uncomfortable about market outlook.
Finance shares have been one of the major sectors that benefited from expectations of supportive Trump policies. However, Bank of America, for instance, plunged 6 percent on March 21 and dropped below the 50-day moving average amid large turnover.
From an engine of bull market to a loss leader, the performance of finance stocks suggest that investors are having a second thought about Trump trades. This sector could also be a leading indicator of whether the Trump rally can go on.
When Donald Trump took over as US president, the market started to rally on expectations of economic stimulus from the new administration. But as Trump has now suffered a bruising defeat on the healthcare bill, investors are beginning to wonder if his other initiatives will also get stalled.
We had a market rally on hope, but now it looks like reality is brewing a pullback.
The full article appeared in the Hong Kong Economic Journal in Chinese on March 24
Translation by Raymond Tsoi
[Chinese version 中文版]
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