Last week was highlighted by the Republicans’ failure to repeal and replace the Affordable Care Act (ACA). The policy setback was not well received by stocks, as the U.S. markets suffered both its worst day and week in 2017.
Stocks have been incredibly well-bid during 2017 with even small interday pullbacks seeing significant buying interest. The market was vulnerable to disappointment. The market’s bigger concern isn't the ACA, but rather if the policy setback indicates Republicans will struggle to pass meaningful tax reduction, infrastructure spending and other pro-growth policies.
In the short term, the markets will be watching this very closely, and I expect to see an uptick in volatility as a result. With the VIX trading in a tight range of 11 to 13 recently, the potential for a breakout above the range seems high. To support further stock gains from current levels, the Trump administration needs to build momentum and consensus around its policy agenda. Look for bond prices to trade in the opposite direction of equity prices and for the inverse correlation to be high over the coming weeks.
I expect the administration to pivot quickly to tax policy but remain skeptical around the ability to organize the different factions within the Republican Party to pass truly transformational change.
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