Stock ETFs Bleed As Trump Tax Cuts Fade

August 18, 2017

Stocks were slammed this week as worries grew that the Trump economic agenda may be in peril. The SPDR S&P 500 ETF (SPY) dropped 1.5% on Thursday, registering its worst decline in three months. At the same time, the small-cap iShares Russell 2000 ETF (IWM) lost 1.8%, nearly wiping out all its gains for the year.

Year-to-date, IWM is now up 0.4%, compared with 9.6% for SPY.

 

YTD Returns For SPY, IWM

 

We've seen this before. Something happens in Washington, D.C., that causes investors to question whether the pro-growth policies espoused by President Trump―tax cuts primarily and infrastructure spending, to a lesser extent―will actually get implemented.  

This week's controversy over Trump's reaction to a racially charged rally in Charlottesville raised doubts that the president can provide the leadership necessary to bring his policies to fruition.

Investor sentiment on the matter for the last few months has fluctuated between hopeful and skeptical, while largely staying near the former, as evidenced by the numerous record highs and all-time-low volatility seen in the stock market for most of the year.

This week, sentiment suddenly swung toward the skeptical side, hitting small-caps―which would be the biggest beneficiaries of tax cuts―the hardest. It's too early to say investors have thrown in the towel on Trump's agenda, but they are clearly getting antsy about it.   

Expensive Market

Investors have every reason to micro-analyze what's going on in Washington. Without Trump's pro-growth policies, the market looks downright expensive. Earnings growth this year has been good, but not great, and certainly not strong enough on its own to support the market's 15% surge since Election Day.

FactSet estimates that profits for companies in the S&P 500 may grow by 9.4% this year, and 7.2% if you strip out the energy sector. 

That's a decent number, and much better than last year, when earnings didn't grow at all, but not necessarily something that would cause the market to spiral upward like it has for the past nine months.

 

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