By Sue Chang, MarketWatch

Bank of America: This is a 'where's the beef?' moment for Trump trade

The stock market will face its moment of truth next week as euphoria over President Donald Trump's lofty agenda to "make America great again" collides with the realities of U.S. politics.

Trump suffered a major blow on Friday when House Republicans withdrew (http://www.marketwatch.com/story/health-bill-pulled-as-republicans-lack-votes-2017-03-24) the American Health Care Act after they failed to secure enough votes to pass the bill.

The withdrawal is a setback to the president who had promised to repeal and the replace the existing Affordable Care Act with a superior plan and casts doubt on how quickly his administration will be able to deliver on other key pledges such as tax reforms.

"Failure may not result in a real tantrum but confidence in the Trump agenda will be weakened by the loss, no matter who he blames it on," said Kevin Giddis, head of fixed income capital markets at Raymond James.

Giddis expects volatility to rise in the coming days given that "so much of the happiness in the equity market was based on a number of initiatives becoming new laws."

The CBOE Volatility Index spiked 15% (http://www.marketwatch.com/story/stock-markets-old-friend-volatility-threatening-to-make-a-glorious-return-2017-03-24) this week to 12.96, its biggest one-week jump this year.

The difficulty over the health-care bill is likely to serve as a wake-up call for investors who had bid up stocks in anticipation of more business-friendly and pro-growth policies from Trump.

"Up to now, the market rally has been based on the expectation that Trump and the Republicans would enact meaningful change," Brad McMillan, chief investment officer for Commonwealth Financial Network, said in a note. "Hope has been the dominant emotion since the election, and all of the political noise has been viewed in that context."

That hope may soon evaporate after investors on Friday got a glimpse of things to come.

The fact that the health-care bill floundered does not bode well for the Republicans' ability to work together and may lead to delays in tax cuts and fiscal stimulus, according to Andrew Hunter, U.S. economist at Capital Economics.

Still, the political drama is not expected to be a death knell for the market's upside momentum.

"There will likely be some weakness but it is doubtful that it would carry far before stocks begin to rally again," said Bruce Bittles, chief investment strategist at Robert W. Baird & Co. "There has been a rapid deterioration in stock-market sentiment the past few weeks. This suggests that cash is accumulating on the sidelines and that some of the potential negative news is already built into current prices."

The S&P 500's relative strength index, a momentum indicator, recently rose above 80 for the first time in 20 years, according to strategists at Morgan Stanley. Although this suggests elevated near-term risks, it also indicates a bullish trend in the long term and the large-cap index has typically risen sharply in the following 12 months.

Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch, predicted a temporary dip in the S&P 500 but believes the correction should not be feared.

"A stock market sell-off can be a good catalyst to bring ultimate passage of legislation," he wrote in a report. "In our view, the Trump trade was always going to meet a 'where's the beef?' moment....This is it."

The S&P 500 fell 1.98 points, or 0.1%, to close at 2,343.98 shedding 1.4% for the week, its biggest drop since November. The Dow Jones Industrial Average slid 59.86 points, or 0.3%, to 20,596.72 for a weekly decline of 1.5%, its worst showing since September.

 

(END) Dow Jones Newswires

March 26, 2017 15:58 ET (19:58 GMT)

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