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In general, political controversies in Washington don't receive much attention from investors because they don't greatly affect economic growth, interest rates or company prospects. Although federal government policies play critical roles in the markets, they're usually part of the scenery, rarely moving downstage. But investors have become increasingly concerned that turnover and turmoil within the Trump administration will prevent implementation of some (or all) of its pro-growth policies, and on May 17, the Dow was down more than 300 points. The Dow and the S&P 500 each dropped more than 1.5%, their largest declines since mid-2016. And as frequently happens when stock prices drop, bond prices rose, pushing interest rates lower. The rate on the 10-year Treasury fell to 2.22%.
After last November's election, stocks, interest rates and the value of the U.S. dollar increased in lock step as investors looked forward to more investor-friendly government policies. These pro-growth policies have three key components: tax cuts (corporate and personal), regulatory relief and infrastructure spending. As policy challenges emerged and inflation remained lower than expected, investors' views have become somewhat more realistic. We think the impacts of the administration's pro-growth policies are likely to be positive but delayed and diluted.
Despite the return of higher market volatility, we think pullbacks offer an opportunity for investors, since the fundamentals of economic and earnings growth look ready to continue to support rising stock prices over time:
In addition, it seems likely that some of the Trump administration's pro-growth agenda will be implemented, providing a further impetus for economic and earnings growth.
Is today's stock market drop a short-term reaction or the start of a bigger pullback? After months of low stock market volatility despite higher uncertainty about economic policies, investors shouldn't be surprised by the return to a more volatile market. It's also not surprising that better-performing investments dropped more as investors reduced the riskiness of their portfolios to prepare for further volatility. We think larger day-to-day price changes could continue as stocks trend higher. That's why it's important to own an appropriate mix of stocks and bonds for your goals and risk tolerance so you can stay invested during times of higher market volatility and stay on track toward your financial goals.
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*Past performance does not guarantee future results.