Immigration Kerfuffle Masks the Real Reason Stocks Fell

Less than one week ago, the Dow hit the milestone 20,000 mark for the first time … and many in the market were feeling pretty good.

Today, stocks fell below that 20K mark. At one point, the Dow was down about 158 points. And based on the jump in the so-called “fear gauge,” or the VIX (up 12.3% in Monday trade), you get the sense that the market isn’t feeling so good.

Of course, the market is responding to news stemming chiefly from, and otherwise related to, President Donald Trump and the Republican government’s policy proposals.

Over the weekend, we saw the confusion, outrage and protests over the president’s executive order to restrict immigration from seven predominantly Muslim countries.

Protests popped up at airports and in cities across the U.S. this weekend.

Curiously absent in that list were many of the countries (Saudi Arabia, United Arab Emirates, Egypt) that have been the most-fertile sources of jihadist terrorism.

This travel policy is dominating the news cycle, and even many high-profile Wall Street executives have come out against it.

Goldman Sachs (GS) CEO Lloyd Blankfein told his employees that the immigration policy causes “disruption to the firm, and especially to some of our people and their families.”

Yet this immigration policy kerfuffle is not the chief reason why stocks are selling off today.

There’s a much bigger reason, and it’s all about tax reform.

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If you think about what’s been driving the equity markets since Election Day, it doesn’t have much to do with immigration reform and travel bans.

It doesn’t have much to do with building a big wall along the nation’s southern border, either.

Note the spikes in the Volatility Index just before the Brexit vote and the U.S. election.

The rally has fed somewhat off the anti-regulatory climate. But even the latest regulation-slashing executive orders that President Trump signed aren’t the reason why the “animal spirits” have been doing a bullish dance on the corner of Wall and Broad.

The main reason why stocks have gone up since Mr. Trump’s surprise victory is the prospect of a pro-growth agenda being implemented by the administration and a Republican majority in Congress.

This prospect is why stocks are trading at high valuations, and it’s why we’ve seen such a sharp surge in the Dow, S&P 500 and particularly the “growth” indices such as the Nasdaq Composite and Russell 2000.

Small caps are up 9.5% since the election.

Key to the implementation of a pro-growth agenda is tax cuts. In particular, a significant corporate tax cut that would take the current rate of 35% down to 20% or even 15%.

Yet on that front, the Washington wheels seem to have ground to a very slow crawl.

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Last week’s gathering of Republican congressional leaders in Philadelphia wasn’t very comforting for Wall Street bulls hoping for corporate tax relief.

In fact, a recent Reuters article described the meeting in the following way with respect to that tax issue:

When it comes to tax reform, senior congressional aides said the spring of 2018 might be a more-likely time than this year for the passage of legislation.

That’s a big “ouch” for traders hoping to see a lot faster progress/implementation of corporate tax reform than sometime next year.

And I think that is a much bigger reason for today’s sell-off in markets than the policy kerfuffle over immigration.

Still, the travel ban issue serves to amplify one of the biggest concerns facing markets today. That is, President Trump’s willingness to power forth and implement much of the agenda he promised he would during the campaign.

Big, controversial policy proposals such as the travel ban have got Wall Street understandably nervous. And the sense of unease and uncertainty about what could come next is palpable.

This is particularly true on trade, as much of Wall Street is fearful that the president will launch some kind of trade war with China and/or Mexico.

The bottom line here is that the further President Trump and the Republican Congress move away from implementing pro-growth policies such as Obamacare repeal/replace, infrastructure spending and corporate tax reform, the more Wall Street is going to worry.

And the more Wall Street worries, the more stocks will struggle.

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If you want to sound off on this issue, or on any of the issues we cover in the Afternoon Edition, then simply leave me a comment on our website or send me an e-mail.

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It was the worst day of 2017 for U.S. stocks. The Dow and S&P 500 lost 0.6% each, while the Nasdaq came 0.8% off Friday’s closing high.

  • Microsoft (MSFT) back at dot-com-era valuations: Mister Softee’s market value returned to $500 million for the first time since 2000 after last week’s positive earnings report. (We all know what happened back then.) MSFT shares fell 1% during the day but are down more in after-market trade.
  • About 150 Delta (DAL) flights were canceled over the weekend, which the company said was the result of computer problems. DAL stock slipped 4% today. American (AAL, -4.4%) and United Continental (UAL, -3.6%) fell in sympathy.
  • Fitbit (FIT) said it’s trimming its workforce by 6% (about 110 people). This sent the stock down nearly 16%, which left it at $6.06 at the closing bell. The San Francisco-based fitness-tracking company also warned that its Q4 numbers will come in lighter than expected.
  • VW (VLKAY) knocked Toyota (TM) out of the driver’s seat as the world leader in vehicle sales last year. TM held that title for four years running. To the winner go the spoils, and also the bigger stock-market losses, as VW slid 2.4% vs TM’s 0.5% slide.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “Immigration Kerfuffle Masks the Real Reason Stocks Fell”

  1. Hi Brad,
    Bottom Line…..from a Macro-Economic Fundamentals, Technical, Cyclical and Demographic standpoint, the capital markets are OVERSTRETCHED even in the most conservative of estimates. This has really very little to do with Trump other than a couple of month riding the perceived benefits of lower taxes and lower regulation, which take a long time to trickle down. Of MUCH more importance are the items I mentioned above, which has led to a world literally CHOKING ON DEBT that is the REAL problem!

  2. Brad: What we need is gold standard for the 21st century and for the world. Fiat currencies have failed us and the world in 1914, 1939 and 1971. Unfortunately we have not learned the from our mistakes. I have written a book called the “Great Betrayal which gives the reader of monetary policy. I argue for a gold standard for us and the world. I point out that from 1870 to 1913, ( a period of 43 years} the world was at peace . All international transactions were done in gold. Inflation was one tenth of one percent. Our economy grew between 4 to 4.5 % per year. The price level up or down was only 1.3 %. This sustained growth is unparalled. The inflationist argue that there is not enough gold in the world. What is more important is what dollar price that a gold commission sets gold at. If every country backs up their money supply up to 40% gold, according to James Richards would have to be 10,000.00 per ounce. Billions of people all over the world are suffering due to currency devaluations. The central banks of the world have caused great harm to the economies of the world. I would appreciate a response. Regards, Robert Calabro.

  3. The partial ban on entering the US may by itself not have much of an importance. It shows, though, some activism that does not address the countries problems. Instead Trump is looking for cheers which did not come at the level of his addiction. Trump is not able to focus and is causing frictions with the party that allowed him to run in their name.
    Naturally people want to see Trump is doing something for them as promised. Well, immigration and abortion may be part of it but have no or very little economic impact. Investors don’t see the infrastructure spending coming which would be the only major catalyst. Taxes are in my view of little importance as barely any company pays the top percentage. Lowering the tax rate to 20% would impact few companies as the companies have armies of tax lawyers and loop hole hunters. Instead, companies collect subsidies like there is no tomorrow. As an example, Scripps took advantage of hundreds of millions offered by the state of Florida, Boeing moved HQ to Chicago for a good chunk of money, and so on. The question remains: How will the current administration pay for infrastructure while pampering the military? More debt by the party that claims they know how to lower the cost of government?
    Obamacare has flaws but it beats people dying prematurely. SS and Medicare can be fixed but the Republicans want their cronies to shovel in more money. Remember, if something is done by a private company this company wants to see profits. If they reduce the cost it is at the expense of quality and availability. In the end, it will be less for the people who paid their share.
    The Republicans need to dump their ideology and do something for the people. Their main goal is an oligarchy combined with a theocracy, not a healthy mix. On the other side, it seems the Democrats are lost in the desert and have no clue where they are going. We need a different election system and more parties.

  4. Brad, I was thinking about this driving home from work today. We have a market that’s one of the most overvalued in history, and many other indicators saying that a correction is in the cards; and they want to blame this on President Trump. Valuations are the reason. All these other things are just possible catalysts to a major trend change.

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